Credit scores are calculated by credit information bureaus after taking their loan/credit card repayment behaviour into account. If you want to have a healthy credit score, you must pay your equated monthly instalments (EMIs) or credit card bills on time. But, missing even a single payment can harm your credit score in many ways. It can also hamper your prospects of getting a loan in the future. This article will take you through the negative impacts of missing even a single EMI/credit card payment on your credit score.
Delayed or missing payments can negatively affect your credit score in varying degrees. Read to know more.
A single late payment will not affect your credit score if you pay it off within 30 days of the due date. At the most, you will have to pay a late fee.
If you go past the 30 day mark, it will damage your credit score temporarily, but that damage can be up to 100 points.
If you are more than 60 days late, you can lose more than 100 points from your credit score.
If you are 90 days late, chances are you have missed multiple payments or delayed one for very long. This will deepen the impact on your credit score as it will tell the bureaus that you can do it again. Note that this will dent your credit score for up to seven years. If you go past the 90 day mark, your loan will be categorised as a non-performing asset.
If you have delayed one or several payments by more than 120 days, your debt will be charged off or sold to third-party collection agencies. This will leave a much greater impact on your credit score.
There are essentially two types of default cases. They are as follows:
Minor Defaults: If you have missed your payments by up to 90 days, it will be considered as a minor default. In such a case, your credit score will take a severe beating, but you will be able to recover from it over time by exhibiting good credit behaviour.
Major Defaults: If you go past the 90 day mark, your loan will be considered to be a non-performing asset (NPA). Not to mention that your credit score will take an even greater beating.If an NPA gets recorded in your credit profile, your chances of getting a loan will become nil as no bank wants to lend money to those people who cannot pay their loans.
Set up auto debits: If your bank allows, you must opt for an auto-debit facility. This way, you will not have to make notes for due dates in multiple places and still run the risk of missing it. All you will need to do is ensure that your account has sufficient funds days before the auto-debit date.
Set up reminders: Another convenient way of repaying your credit obligations on time is by setting up reminders in your phone as well as your other devices. These days, you can even install dedicated apps that will remind you of your upcoming due date up to a week in advance. Such applications can come in particularly handy if you use multiple credit cards or have multiple loan accounts.
Pay weekly: Another way of not missing payments is by making them in advance or paying off several instalments over the course of one single month. Like that, you may even be able to pay off your loan a bit faster.
If your credit score has already taken a beating because of a late payment, do the following things to recover it over time:
Make timely payments: If you pay your credit card bills and EMIs on time, your credit score will naturally heal with time.
Avoid closing credit cards: Credit cards with long standing credit histories can serve as proof of your creditworthiness, hence it is advisable that you keep them until their expiries. If you want to close them, make sure that you follow the appropriate procedure by securing a no objection certificate (NOC) from your bank.
Maintain a healthy credit mix: Make sure that your credit portfolio has a combination of secured and unsecured loans, with the latter not surpassing the former in terms of outstanding amount.
Prepay your loans when you can: Loan prepayments also indicate responsible credit behaviour, which means that loan prepayments can impact your credit score positively.
Maintain a low credit utilisation ratio: The percentage of your available credit limit that has been used by you is called your credit utilisation ratio. Make sure that you do not use more than 30% of the same in order to maintain your credit score.
Apply for loans sparingly: If you apply for loans often, banks or other lending institutions will keep pulling up your credit score to check your repayment history. These probes are recorded as hard inquiries in your credit information report. A high number of hard inquiries made over a short span of time indicates credit hungry behaviour, and this can also harm your credit score negatively.
1 missed payment can affect your credit score, but the damage is not long-term. But, if you do not make a particular payment for over 90 days, it can affect your credit score for up to seven years.
If you have missed a payment for over 90 days, it will impact your score for seven years.
If you have a long standing relationship with your lender and have paid the loans given by them in the past on time, you can ask for a goodwill adjustment. For that, you will simply need to write a letter explaining why you missed out on the payment. If you have made timely payments in the past, the lender might just forget your late payment.