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How do late payments affect your credit score?

By Sean Cooper

All it takes is one late credit card or loan payment to cause a serious hit to your credit score.

This is because your payment history is typically the most important factor used to calculate your credit score, so it’s important to minimize late payments – or, if possible, completely eliminate them -- in order to maintain a healthy credit score.

What qualifies as a late payment?

Lenders use standard codes when sending your payment information to the credit reporting agencies. At the end of each code is a number between one and nine that relates to whether your payment was made on time.

If you make an on-time payment within 30 days of billing, this is considered ideal and you’ll typically receive a “one” rating.

This rating can help maintain and improve your credit health. If the number is two or higher, it’s considered a late payment and could negatively impact your credit health. A rating of two means your payment was made 31 to 59 days late.

“There are many factors that affect your credit score, and payment history is a key component,” says David Blumberg, public relations director of TransUnion. “Paying bills on time each month can have a positive impact on your score, while late payments can negatively impact your score and stay on your report for up to six years.”

“Also, a more recent late payment may be more detrimental to a credit score than one from several years prior,” Blumberg says.

When are late payments reported to the bureaus?

If you’ve made a late payment, whether on your credit card, mortgage or other type of loan, it typically doesn’t take long for it to appear on your credit report. According to Blumberg, creditors generally report late payments in the month following the late or missed payment.

It usually appears on your credit report shortly after.

Don’t forget: If you miss a payment and you manage to make the payment before it’s reported to the bureaus, you may still be hit with additional penalties, such as a higher interest rate.

How does a late payment affect your credit?

The later the payment is, the more your score could fall.

For example, if you make your payment 60 days past the due date, it may have a more severe effect on your credit than if your payment were only a couple of days late.

Regardless, any late payment, no matter how late, can have a severe impact on your score.So why is this the case? When a creditor or potential lender looks at your credit history, they’re using it to decide whether or not to extend you credit.

“Late payments can affect your report and score because they demonstrate your inability to repay a current or previous loan, and what your ability to repay a future loan may be,” Blumberg says.

How long does a late payment stay on your report?

In Canada, a late payment can stay on your credit report for up to six years.

However, the date when the credit reporting agencies start counting the six years for the negative information on your credit report differs.

With Equifax, the clock starts ticking at the date of your last activity (such as when you made your last payment).

With TransUnion, it starts from when you were first delinquent on your credit account (for example, when you made a late payment) without returning to good standing.

Tips to help avoid late payments

Missing a payment is never fun and may hurt your credit score, but there are ways to get on top of your payments.

“I set up a recurring calendar reminder twice a month to prompt me to log into all my accounts, review them and pay off any balances. I do this primarily for my credit cards and have auto bill payments set up for the rest of my recurring monthly bills,” says Stephen Weyman, personal finance blogger at HowToSaveMoney.ca.

Weyman says that logging in every 15 days makes it less likely that you’ll make a late credit card payment because you generally have a minimum of a 21 day grace period to make a payment.

Bottom line

By taking steps to minimize late payments, you can help keep your good credit score intact. This could be especially beneficial next time you borrow money, such as applying for a credit card or mortgage.

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