Sooner or later, it seems that all of us miss a payment date on a loan. Sometimes we know about it, other times we simply had no clue. What happens to your credit score when you don’t make a payment on time? If you’ve ever asked your buddy this question, you probably heard something like, “If you’re late by one day, it kills your credit score!” Well, I’m here to tell you the truth about late payments. Let’s dive in!
There are several myths that come to mind that fall under this category, and I’ll address them all. Here are the myths and responses, in no particular order:
1) Paying your monthly loan payment early helps your credit score.
Sorry, but this isn’t true. Your credit report shows whether you made a payment on time or not, and the level of detail does not include early payments. You get a green check on your credit if you paid it on the exact payment date or 15 days early. The green check isn’t any different on either scenario and the exact payment date doesn’t affect your credit score any differently, as long as it isn’t 30 days late.
2) Paying extra towards principal on your monthly loan payment boosts your credit score
This depends. Assuming your payment isn’t late, the “extra” amount you add to your due payment won’t affect your credit score on a fixed loan, like an auto loan or mortgage. As I mentioned in point 1, your credit report just wants to know if it was on time or not. The only way paying extra would help your score would be if you made a payment on a line of credit. This is different because part of the formula that makes your FICO score is “credit utilization.” I talk about this in more detail on my page here. For our purposes on this page, I’ll simply say that the extra principal payment will lower your total credit utilization percentage, which will likely boost your score. Fixed loans aren’t factored in the same way. If you pay extra on a fixed loan, you are ultimately paying less interest during the course of the loan, which does save you money in the long run.
3) A payment made one day late hurts your credit score
Now we get to why you came to this page. I threw you a hint earlier when I mentioned the line about being 30 days late. On your credit report, the first threshold that hurts you on your monthly payment is at the 30 day mark. Loan officers and credit underwriters are familiar with the 30/60/90 day markers. This means that a 30 day late payment is bad, 60 days late is worse, and 90 days late is terrible. However, the bad marks on your credit report don’t start until you hit 30 days. That means if you make a payment 20 days late, your score isn’t impacted. If you make a payment 31 days late, your score is dropping. Now, your lender will likely impose a late fee on your account if you’re 1 day late, but your score won’t look any different. The good news is that if you run into a rough spot on making a loan payment, you have a full 29 days where you can still make the payment and it won’t impact your credit score. One 30 day late payment will greatly affect your credit score, even if it’s excellent. Try your best to avoid it. A 90 day late payment is a death sentence for getting a new loan. Your odds of approval go WAY down. If you do end up with one or more late payments on your credit report but quickly turn it around and go back to all your payments being on time, then distancing yourself from the late payment is the best course of action. That simply means the further in your past the late payment was, the better. Was it last month? You’re probably not getting a new loan. Was it a year ago? You should be ok as long as there is enough supporting evidence surrounding it that you’re a good credit risk.
Bottom line: a late payment under 30 days late won’t change anything other than a late fee. Your credit score is fine. If anyone tells you otherwise, it’s time to share this article and help bust this money myth.
