How badly does one late payment affect my credit score?
One late payment surely couldn’t be that bad for us, could it? All of us might be guilty of it at least once in our life, missing a rent payment and having to double up on it the following week. We are all only human and everything gets sorted with no harm caused in the end. So would this even ever come back to bite us later in life? The sad truth is, yes it may, by affecting our credit score.
Our credit score is essentially a financial CV that is used to determine whether we are financially viable and can meet the financial obligations of taking on credit. An individual with an excellent credit score would have a long, consistent credit history of making payments on time, pretty much a proven track record that they are capable of borrowing. An individual with a poor credit score may have a few mishaps or small blemishes on their record such as missed payments or bankruptcies. Credit scores used to be solely made up on negative reporting as this is what lenders would use as information to determine our potential risk of lending to. These negative credit events were:
- Late Payments: A creditor may report this, even if the debt is settled before the payment has defaulted
- Defaults: A late payment of debt over $100 that is overdue by 30 days
- Credit Enquiries: Having too many credit enquiries makes you appear to lenders that you are desperate for money
- Court Summons or Judgments: Being called to court about debt creates red flags for creditors
- Bankruptcies: Having filed for bankruptcies negatively impact your credit score and stays on your report for four years after the bankruptcy ends.
Now credit agencies use comprehensive credit reporting for our credit scores, which includes positive credit events such as repayment history and our other existing credit limits. Comprehensive credit reporting works great for us as it gives us a fair representation of our credit history as creditors get to see all our positive contributions too. But these positive credit events don’t exactly have the same weighting on our scores like negative credit events do.
A negative credit event such as having a late payment on our rent or utility bill can decrease our credit score by a fair bit. An actual valuation of how much of a decrease occurs is difficult to make due to different creditors and credit agencies having different models for evaluating our information and determining our credit scores. Factors surrounding your late payment such as, how much it was, how recent it was, and how frequently we have paid late, all go into determining the how negative event impacts our credit score.
So if we have made a late payment, what should we do?
Make sure it doesn’t happen again. A negative credit event such as a late payment impacts our credit score more significantly than a positive credit event such as making a regular payment on time. We will have to accept the fact that we have set ourselves back and negatively impacted our credit score. We must then begin the slow grind of bringing it back up by consistently having positive credit events and no negative ones. There is no quick way to fix it. If you are aware that you have made a late payment recently and you are interested in applying for a loan, it may pay to check your credit score. As the interest rate you may have thought you would get a month ago, might not be the same.
If you are interested in checking your credit score for free, then we recommend checking out Credit Simple and getting an estimation for your credit score today!