Credit Reporting: When Is a Late Payment Late ?
Life gets busy, you are out of town, or you just plain don’t have the money when the bill comes due. When is it time to stress over a late payment and when will it be reported to the credit bureaus. If you are short on cash, which bills are safer to pay late and which should you absolutely pay on time if at all possible? There are many question around late payments and their impact on your wallet, your credit report and your credit score.
What Type of Bill Is in Question?
The first key factor is which bill are you considering paying late. Certain bills have built in grace periods that can be capitalized on if the need arises. Mortgage Loans are one example.
Mortgages and loans against a real estate property have a 15 day grace period before a late fee will be charged. This will include both first and second mortgages on your primary home, rental properties, and second homes. The late payment is reasonable and a 30 day late payment will not cause you to lose your home. Mortgage companies generally wait until several months of missed payments have occurred before threatening foreclosure. Penalty interest rates generally do not apply. Letting the mortgage payment get too far behind, however, will reduce your chances of catching the bill up and can result in losing your residence and being required to move.
Car payments and other personal property loans generally have a 5 day grace period. The timing of a repossession will be dependent on your credit, the lender, and your payment history. If you tend to make payments on time they will generally work with you to help you catch up. Those with poor credit may lose the use of the car after five days and subprime lenders are more aggressive when hiring a repo company. If your car is repossessed, you may still be able to get it back by catching up the payments and paying the cost of the repo.
Homeowners Insurance payments will allow a policy to lapse for a short period of time depending on the state in which you live. Most states have 15 or 30 day grace periods. When there is a lien on the property, the lienholder can charge a high rate for lapsed coverage to pay for an emergency policy or you could pay fines for not having proper coverage.
Utilities often have up to a 60 day grace period with a very reasonable late fee. However, if you allow the utility to disconnect service through lack of payment you must get the whole bill caught up plus pay a reactivation fee. This could be as much as two months of payments. If service is disconnected more than once, the utility company may require a deposit to be made to regain service. Cable and satellite companies may offer the option of suspending service for up to six months without impacting a contract, though it will extend the contract for any suspension period.
Government backed student loans have low late fees and are generally willing to work with you to get payments caught up. The income based payment option can also provide annual relief if you are struggling with cash flow.
Credit cards do not come with a grace period. One day late and a late penalty is assessed. Two late payments in a row and you can be stuck with a very high penalty interest rate. With a history of on time payments you might be able to get a single late fee waived once a year as long as the payment is caught up before the billing cycle ends.
Lender Reporting Practices
Lenders will typically report all of their accounts in a single category on the same day of the month. This will not generally correspond to your payment due date. The benefit is that because of this, many lenders do not consider you late until the next bill date has passed, meaning you will have completely missed one payment and are late on the second. If they report early you could be reported as missing a payment that is only a few days or a few weeks late.
Lenders have the discretion of when to report payment history and at what point they will report an account as past due or delinquent. In addition to general practices, they consider the account's payment history. If you are close to 30 days late but you generally pay on time the account may be scheduled to let a full payment cycle pass before reporting the account. If you have a history of late payments the bank may have you in the category to report late payments immediately. Personal payments history will impact the reporting schedule.
Insurance and utilities do not typically report to the credit bureaus unless they go into collection. This means they will not help build your credit score and will only hurt you if there is a failure to make timely payments.
FICO Scoring Practices
From a FICO scoring standpoint, payments from 1 to 30 days late are listed as “30 days late” and payments that are 31 to 60 days late are listed as “60 days late.” This means a late payment that is only a few days late could potentially impact your score as a 30 day late even if it is only a few days late.
Credit Bureau Reporting Practices
The credit bureaus offer a longer grace period when it comes to late payments. Their practice is to list a “30 day late” as payments that are 30 to 59 days late. A “60 day late” will be charged to accounts that are 60 to 89 days late and so forth.
How This Impacts You
Typically, you will have a negative financial impact to the account before you will have a ding on your credit file. Late payments on accounts can impact your credit score immediately depending on the lender’s reporting practices. The best way to learn what your documented credit history is will be to obtain a free copy of your credit report on www.annualcreditreport.com. Here you will be able to review your payment history for each account.
The impact of a late payment for loans, credit cards and student loans can be significant if it is your first late payment. Accounts with a history of late payments may result in a smaller impact when additional late payments are made. Recent credit scoring changes have reduced the impact of a single late payment, yet if you miss a payment on a couple accounts you could see a score drop as much as 100 points initially.
For debt that is being negotiated, part of the negotiations might include credit reporting considerations such as having the lender remove the account completely as part of a repayment or settlement agreement. This strategy is likely to improve your credit score faster than if the negotiated debt remains on your report for the full seven years from delinquency.