Financial Education Series

How do late payments affect your credit score?

It happened to many of us to make late payments in the past. It certainly doesn’t feel great, but the consequences can be even more unpleasant. How exactly do late payments affect your credit score? Can a single missed payment leave a black mark on your credit report? Read on to find out. 

Your payment history is the largest factor that makes up your credit score, accounting for 35% of the total number. The Comprehensive Credit Reporting (CCR) launched in Australia in 2017 provides a fuller, clearer picture of your credit history. Credit providers are now able to record a late or missed payment on your credit file as part of your “repayment history information” when your payment is over 14 days late. Late payments can stay on your credit file for up to 2 years. Missing one payment by more than 14 days might not necessarily have significant consequences, but a series of missed payments could indicate to lenders that you’re in financial stress which in turn can affect your ability to obtain credit in the future.

Only licensed credit providers such as banks and financial institutions are able to disclose repayment history information to a credit reporting body like Equifax. Telco and utility companies are not licensed credit providers and cannot supply or receive this information. 

What’s important to note is that a default can be recorded on your credit report by any credit provider (including telco and utility companies) if you miss a payment which is more than $150 and is more than 60 days overdue. Defaults occur after 60 days and are considered a serious influence on your credit score. 

Before listing a default the credit provider must have taken steps to collect the whole or part of the outstanding debt. This means they have sent you a written notice setting out the amount overdue and seeking payment and a separate written notice advising you that the debt may be reported to a credit reporting body. 

Both late payments and defaults have a negative impact on your credit score, but defaults are potentially more damaging to your credit reputation, as it can stay on your credit file for up to 5 years regardless if you have already settled it, making you less attractive to lenders as long as it remains on your file.

What to do when your payment was late?

If you missed a payment, the most important thing to do is to bring the payments up to date as soon as you can. And then you need to continue to make all payments on time going forward. 

If you’re not able to pay it off, make sure you at least touch base with your creditor and explain the situation. It may be able to offer a payment plan solution instead of sending your account to collections.

How to prevent late payments in the future?

The easiest way to avoid late payments entirely is to sign up for autopay on all your accounts. If you’re not budgeting regularly, try setting up these payments right after you get paid, when you have the most cash. You might also consider downloading apps that can help you stay on top of your finances. If it’s hard for you to find apps that suit your needs, try some of these.  

The consequences of not making your repayments can be significant depending on your situation. Therefore, it always pays to be diligent in making your repayments on time – every time.

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