Have you ever considered what the effects of that late payment can have on your credit? If you are in the habit of making late payment, I will say that credit card is not meant for you. You may be asking ‘what is a big deal in it, after all you later paid up?’ Well, it is more than that. Before I start telling you the effects a late payment can have on your credit, it is important that I mention that late payment in this context is not restricted to credit cards alone, it covers other types of credits and loans. What is late payment? It does not imply that you did not make your payment. It simply means not honouring your obligation on or before the due date. So, if you are to pay $500 at month end and you pay on the second or fifth day of the following month, it is already a late payment. Why late payment? People may fall victims of late payments for reasons which may differ from one person to others. Let’s look at the possible reasons below:
Reasons for Late Payment
Liquidity challenge: You may have a good intention to pay but if you don’t have money that will enable you settle your debt, you will definitely experience late payments. Liquidity challenge may be caused by loss of job or delay in expected receipts. It can even be that somebody defrauded you by hacking into your account thereby making your account balance to suddenly disappear or fall short of what you expect. Another reason is that some people don’t set realistic repayment amount with their lender. So, any little emergency payment will make them unable to meet the repayment amount. It is always good to make allowance for emergency. This will allow you set realistic amount that will not be difficult to pay at the end of the month.
Oversight: You may have the money but if you don’t organise your activities properly, you will always find yourself making late payment. To prevent this type of scenario, you can set automatic payments or alerts. You can also request that your lender send you mails to remind you of your due payments.
Lack of discipline: If you are the type that usually buys things on impulse, you will end up biting more than you can chew. There is an adage that says, it is sweet eating delicious meat on credit but repayment is challenging. You don’t need to put yourself under unnecessary pressure. You should cut your cloth according to your size. Don’t buy things that are above your income level.
Effects of Late Payment
Late penalty fees: If you read the terms of your loans or credit carefully, you may notice that your lender specifically mentioned that you will have to pay certain amount as a late payment fee any time you fail to make your payment as at when due. You may not know that this exists until you make a late payment. On the other hand, people tend to be over-confident about themselves thinking that they will never have any reason to pay their balance late. It is important that you ask your lender if late payment fee applies and what the fee will be.
Application of Penalty APR. Penalty APR is usually higher than regular APR. When you default in payment, the lender may increase your APR to penalty APR. The increased interest rate makes the repayment more difficult. As a result of the burden which the penalty APR usually places on consumers, the Card Acts 2009 promulgated by Federal Trade Commission prohibits arbitrary increase in interest rate without giving 45 days notice. Any new rates will only apply to the existing balance if you are 60 days late in payments. Also, your rate cannot be increased if your account is less than a year except on the ground of expiration of introductory promotional rate. However, if you can pay promptly for good 6 consecutive months, you will have your rate reversed to what it was before the penalty rate was applied.
It appears on your credit report: If your payment is more than 30 days, your card issuer or lender will report this to the three consumer reporting agencies. This will make it to appear on your credit report and it can stay for 7 years before it is removed. On your own, you will not be able to remove this. The only option left for you is to ensure you pay your balance up to date and continue to make regular payment consistently. Then you can negotiate with your lender to withdraw the late payment notice sent to the consumer reporting agencies.
Reduction of credit score: Your payment history is one of the vital factors that contribute to how the consumer reporting agencies determine your credit score. So, if you have late payment on your credit report, this can drop your credit score significantly. The level of the effect a late payment will have on your credit score will depend on how recent it is, its frequency and the length of days you defaulted in paying. Without a good credit score, you may not be able to secure credit cards, loans, purchase insurance or even rent an apartment. If at all you are able to do any of this, it may come with very high rates. So, it is better to avoid late payments. Just a small default in paying up your obligation today can cost you a lot much more in the future. If you know you will not be able to make payment promptly for one reason or the other, it is better to avoid the loans or you don’t carry balance on your card. For any existing loan or card balance, you can take a proactive step by renegotiating with your lender. If you have been making your payments regularly, they may reason with you and help you arrange for more convenient way of paying back the loan.
In conclusion, it is totally to your disadvantage to make late payment. When the deed is done, it may not easy to be corrected. Therefore, you have to be careful how you arrange your financial activities.