credit score impact of missed payments

The Real Impact of Missed Payments on Your Credit

August 01, 202417 min read

Missing a payment on your credit accounts can feel like a minor slip-up. But in reality, it’s a significant misstep with long-lasting repercussions. 

When you miss a payment, it’s more than just a ding on your credit score—it’s the start of a financial overhaul. 

The good news? There are proven strategies to bounce back and improve your credit.

By staying informed and proactive, you can turn this challenge into an opportunity to strengthen your financial health. Then, you can move forward with confidence.

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Everyone faces financial difficulties at some point, which can lead to missing a payment. But you don’t have to just accept the situation as it is.

Let's dip into the harsh truths behind missed payments and explore actionable steps you can take to regain your financial footing.


The Immediate Fallout of a Missed Payment

Fallout of a Missed Payment

When you miss a payment, the consequences start to flare almost immediately.

Many consumers worry about how this will affect their credit score. However, the deeper effects are even more concerning. 

Missed payments can balloon interest rates, making future payments harder to manage. This can create a cycle of debt that is difficult to break.

Additionally, the constant worry about financial stability can take a toll on your mental health. 

Understanding these impacts can help you prepare and take proactive steps.

Let's investigate what happens right after a missed payment.


Credit Score Impact of Missed Payment

credit score impact

So, when we miss a payment, whether for a loan, mortgage, or credit card, the first thing that comes to mind is the impact on our credit score. 

It's a natural concern because we all know how important a good credit score is for securing future loans and getting favorable interest rates. 

You can see below how even a single missed payment can damage your credit score:

credit score drop
  • A single missed payment can drop your credit score by 90 to 110 points if your credit was previously good to excellent. Say, for example, you have a 720 credit score, then missed one payment, it can drop from 630 to 610.

  • For those with a lower starting credit score, the impact might be slightly less severe, but still significant. The damage ranges from 60 to 80 points.

  • The first late payment on a pristine credit record is the most damaging. Subsequent late payments, while still harmful, may not cause as dramatic a drop.


Missed Payment Reporting Timeline

Understanding the impact on your credit score is just the beginning. The timeline for how missed payments is reported plays a crucial role in this process.

missed payment timeline

Creditors typically report missed payments to the credit bureaus (Experian, Equifax, and TransUnion) once they are 30 days overdue.

If a payment is missed by 60, 90, or even 120 days, each step causes further damage to your credit score.

What happens if the payment is more than 120 days overdue? 

The situation becomes even more serious. 

The account might be sent to collections, which can severely impact your credit and lead to additional fees and legal actions.

delingquent loan

Knowing this timeline can help you take swift action to minimize the negative effects.


Financial Penalties for Skipping Payments

When you miss a payment, another thing to be concerned about is added budgeting burdens. You see, when you skip a payment, the financial penalties can add up quickly. 

penalty

This just makes a tough situation even worse.

Most credit cards and loans impose late fees for missed payments, ranging from $25 to $40 each time. These fees might seem small individually, but they can accumulate quickly and strain your budget.

In addition to late fees, missed payments can lead to interest rate hikes. Some creditors might increase your interest rate after just one missed payment. This means you'll end up paying more over time for the same amount borrowed.

For example, imagine you have a $1,000 credit card balance with a 15% interest rate. If you miss a payment and your interest rate increases to 20%, your monthly interest charges will go from $12.50 to $16.67. 

Over a year, this increase means you'll pay an extra $50 in interest alone.

If you continue to miss payments, the compounding effect of higher interest rates and late fees can significantly increase the total cost of your debt.

These financial penalties can create a cycle of debt that feels impossible to escape. Understanding these potential costs can help you make better financial decisions and avoid falling into this trap.

Our take: When you find yourself missing payments, it's essential to address the issue as soon as possible. This is to minimize these penalties and regain control of your finances.


The Long-Term Consequences of Missed Payments

long term impact of missed payment

The effects of missing a payment go far beyond a temporary drop in your credit score. 

Remember, the financial penalties like late fees and higher interest rates are just the beginning.

Prolonged Credit Damage

In the long run, missed payments can lead to even bigger issues. For starters, they can cause your interest rates to rise.

prolong credit damage

Lenders view missed payments as a sign of risk, so they might charge you more to borrow money in the future. This means you'll pay more over time for loans or credit cards.

  • Missed payments remain on your credit report for seven years, affecting your ability to obtain credit, rent an apartment, or even secure employment.

  • The severity of the missed payment’s impact diminishes over time, but lenders can see the record for the entire seven-year period.

  • Missed payments can also increase your stress and anxiety. The constant worry about your financial situation can affect your mental health and make managing your finances even more challenging.

Understanding these long-term effects helps you see why it's crucial to address missed payments as soon as possible. 


Higher Interest Rates

When you're struggling financially and unsure where to find the money, you might feel like accepting higher interest rates is your only option. 

higher interest rate

However, this can lead to even bigger problems.

  • With a lower credit score, you’ll likely face higher interest rates on any new credit you seek, from credit cards to auto loans and mortgages.

  • This increase in interest rates can cost you thousands of dollars over the life of a loan.

skyrocket interest

Sample Interest Rates Based on Credit Score

1. Excellent Credit Score (750-850)

  • Interest Rate: 3.5%

  • Monthly Payment for $10,000 Loan (5 years): $181.93

2. Good Credit Score (700-749)

  • Interest Rate: 5.0%

  • Monthly Payment for $10,000 Loan (5 years): $188.71

3. Fair Credit Score (650-699)

  • Interest Rate: 7.0%

  • Monthly Payment for $10,000 Loan (5 years): $198.04

4. Poor Credit Score (600-649)

  • Interest Rate: 10.0%

  • Monthly Payment for $10,000 Loan (5 years): $211.12

5. Very Poor Credit Score (Below 600)

  • Interest Rate: 15.0%

  • Monthly Payment for $10,000 Loan (5 years): $237.36

Explanation

  • Excellent Credit Score (750-850): Typically, borrowers with excellent credit scores enjoy the lowest interest rates.

  • Good Credit Score (700-749): Rates are higher but still favorable for those with good credit.

  • Fair Credit Score (650-699): Higher interest rates are charged due to increased risk.

  • Poor Credit Score (600-649): Substantially higher rates reflect the higher perceived risk.

  • Very Poor Credit Score (Below 600): The highest rates are applied, making borrowing significantly more expensive.

This example illustrates how missing payments and having a low credit score can lead to much higher interest rates, affecting your overall loan costs.

What to do then? Well, it starts with discipline. Assess your financial standing and fix your credit.


Difficulty in Obtaining New Credit

new credit

Another impact of a low credit score due to delinquency is the difficulty of being approved for new credit. Why? The answer is pretty straightforward.

  • Lenders may view you as a higher risk, making it harder to get approved for new credit lines.

  • If you are approved, it might be with less favorable terms, such as lower credit limits and higher interest rates.


Steps to Fix the Damage of Missed Payments

Recovering from a missed payment can be challenging, but it’s not impossible. It's not the end for you. I have helped thousands of clients in the same situation. 

The secret here is being aware of "cause and effect, (which I'm sure you understand by now) and moving forward with better financial habits.

missed loan payment

Immediate Actions

Don’t fall into the trap of thinking, “Oh, I can just pay the one-month penalty, then I’ll double my payment next month.” 

This approach often leads to overwhelming interest rates and finances getting out of control.

Here’s what you should do instead.

  1. Pay As Soon As Possible: Even if you’re only a few days late, pay immediately. This helps prevent it from being reported to the credit bureaus and causing further damage to your credit score.

  2. Contact Your Creditor: Reach out and explain your situation. Many creditors may be willing to waive the late fee or agree not to report the missed payment, especially if you have a history of making timely payments.

If you choose this path, you can limit the damage and get back on track.

Rectify Your Report

Another thing you should be aware of is that missed payments are not always your fault. Sometimes, the issue can stem from a problem with your creditor. 

Here’s how to address this.

read credit report

  1. Check Your Credit Report: Obtain a free copy of your credit report from each of the three major bureaus—Experian, Equifax, and TransUnion. Carefully review your credit reports to ensure there are no errors or inaccuracies.

  2. Dispute Inaccuracies: Remember, you can dispute negative items in your credit report. If you find incorrect information, dispute it directly with the credit bureau. This can help clear up mistakes and improve your credit score.

  3. Consider Credit Repair Software: To simplify the process, use credit repair software. This tool can help you manage disputes, keep track of your progress, and stay organized.

By following these steps, you can tackle inaccuracies and enhance your credit profile, helping to put you back on the path to financial health.

Develop a Recovery Plan

recovery plan

Recovering from missed payments involves more than just addressing the past—it’s about planning for a stronger financial future.

Here’s how to get started.

  1. Create a Budget: Establishing a budget is crucial for making sure all your future payments are on time. As Robert Kiyosaki, author of Rich Dad, Poor Dad, suggests, "Financial freedom begins with understanding where your money goes." By tracking your income and expenses, you can prioritize paying down existing debts and manage your finances more effectively. Think of a budget as a roadmap to get you back on track and prevent future issues.

  2. Set Up Payment Reminders: One of the easiest ways to avoid missing payments is by setting up reminders. Whether through your bank, a budgeting app, or a simple calendar alert, these reminders can help you stay on top of due dates. Many say, "I’ll just remember to pay on time," but life can get busy. 

Automatic payments or reminders are a practical solution to keep your payments on track and avoid late fees.

These actions not only help prevent missed payments but also create a strong foundation for long-term financial stability.

Build Positive Credit Habits

positive credit habits

After addressing immediate actions and correcting inaccuracies on your credit report, focus on building positive credit habits to strengthen your financial future.

Here’s how to continue making progress.

  1. Use Credit Wisely: Keep your credit card balances low and aim to pay off the full balance each month. After taking steps to address past missed payments, using credit wisely is essential for maintaining and improving your score. As the saying goes, "The best way to build credit is to use it wisely." Keeping your balances low and avoiding interest charges will help you stay on track and build a positive credit history.

  2. Diversify Your Credit Mix: If feasible, manage a mix of credit types, such as credit cards and instalment loans. A varied credit mix shows that you can handle different types of credit responsibly. Financial expert Dave Ramsey notes, "A healthy credit mix demonstrates your ability to manage various types of credit," which can positively impact your credit score.

  3. Be Patient and Consistent: Remember, rebuilding your credit takes time. Consistency is key—make timely payments and stick to your budget. Remember, "Credit repair is a marathon, not a sprint." Over time, your dedication to positive credit habits will lead to improvements in your credit score.

This approach not only fixes past issues but also paves the way for a brighter financial future.


Why People Usually Miss a Payment

After understanding the serious impact of missing a payment, it’s important to look back and understand why it happened in the first place.

Why did you miss the payment?

Missing a payment happens more often than you might think, and it’s usually due to common, relatable issues.

Here’s why it often occurs.

  1. Busy Schedules: Life gets hectic. Whether it's balancing work, family, or personal commitments, it’s easy to forget a due date. Many people say, “I just lost track of time.” Setting reminders can help prevent this.

  2. Financial Strain: Sometimes, it’s a matter of not having enough money available. You might think, “I just didn’t have enough to cover the bill.” If unexpected expenses come up, it can be hard to manage payments.

  3. Unexpected Emergencies: Emergencies and unexpected events can throw off your financial plans. You might experience something like, “I had a car repair that I didn’t plan for.” These situations can lead to missing payments if they disrupt your budget.

  4. Confusion Over Due Dates: Confusion about when payments are due is another common issue. You might think, “I thought the payment was due next week.” Misunderstandings about due dates or payment schedules can lead to missed payments.

Being aware of potential pitfalls and setting up systems to manage your payments can keep you on track and prevent missed payments in the future.


Preventing Future Missed Payments

To avoid the pitfalls of missed payments, it's important to tackle the common causes directly with practical solutions.

Here’s how you can prevent missed payments in the future:

Busy Schedule

If the common reason for your missed payment is a busy schedule, autopay is the solution.

  • Set Up Auto Pay: Automatic payments are a lifesaver for those busy moments. By enrolling in auto-pay, you ensure that your bills are paid on time without needing to remember every single due date. This can be particularly helpful for fixed expenses like rent or utility bills. For example, many people find that setting up auto-pay for their credit card prevents late fees and interest charges, even when they’re juggling a packed schedule.

  • Use Budgeting Apps: Digital tools like Mint or YNAB (You Need a Budget) are invaluable. They not only help you track your spending but also send you reminders about upcoming bills. 

Imagine having a personal assistant who nudges you whenever a payment is due—that’s what these apps can do for you.

  • Set Payment Reminders: Sometimes a simple alert is all you need. Use your phone’s calendar or reminder apps to set notifications a few days before your bills are due. This way, you get a heads-up and can ensure the funds are available.

Financial Strain

Financial difficulties can make it hard to stay on top of payments. 

Here’s how to mitigate this issue.

  • Build an Emergency Fund: An emergency fund acts as a financial safety net. Aim to save 3-6 months’ worth of expenses. For example, if your monthly expenses are $2,000, having $6,000 to $12,000 set aside can cover unexpected costs and keep your payments on track during tough times. This buffer can be crucial in avoiding late payments due to unforeseen expenses.

  • Avoid Excessive Debt: Being mindful of how much debt you take on can prevent financial strain. When making major purchases, such as buying a car, your monthly payment shouldn’t exceed 15% of your gross monthly income. For instance, if you earn $4,000 a month, aim to keep your car payment below $600. This ensures that your debt remains manageable and reduces the risk of missed payments.

Unexpected Emergencies

Emergencies can disrupt even the best financial plans. 

Here’s how to stay prepared.

  • Have a Financial Buffer: Beyond your emergency fund, maintaining a small buffer in your budget for unexpected expenses can help. For instance, having an additional $200 to $300 set aside for unforeseen costs can prevent these expenses from impacting your scheduled payments.

  • Plan for Contingencies: Factor in potential emergencies when creating your budget. This proactive approach helps you stay prepared and prevents emergencies from derailing your financial plans.

Confusion Over Due Dates

Misunderstanding or forgetting due dates can lead to missed payments. 

Here’s how to stay on top of your schedule.

  • Track Due Dates: Use a financial planner or digital calendar to keep track of all your payment due dates. Marking these dates helps ensure you’re aware of when each payment is due and prevents last-minute scrambles.

  • Double-Check Statements: Regularly review your billing statements for accuracy. This helps you spot any discrepancies and stay informed about your payment schedule. For example, if a statement shows a different due date than expected, addressing it promptly can prevent missed payments.

With these strategies, you not only prevent missed payments but also build a more resilient financial routine. Each step helps you manage your payments effectively and safeguards your credit health, setting you up for long-term success.


Negotiating with Creditors About Missed Payments

Missing a payment due to a busy schedule or due date confusion is easy. But what if it's because you just don't have the funds to pay? 

Whether you’ve lost your job, faced an unexpected illness, or struggled with budgeting, financial challenges can make payments tough.

The best thing you can do in this situation is to communicate directly with your creditors. Why reaching out can make a big difference.

Why Communicate with Creditors?

When you’re struggling to make a payment because money is tight, talking to your creditors can offer several benefits:

  • Payment Holidays: Many creditors are willing to offer a payment holiday or temporary break if you’re experiencing financial difficulties. This means you can pause your payments for a short period, giving you some breathing room to get back on track.

  • Waived Fees: Creditors might agree to waive late fees or penalties if you explain your situation. This can ease the immediate financial pressure and help you avoid additional charges.

  • Extended Terms: Negotiating with your creditor could result in a longer repayment term. This spreads out your payments over a longer period, reducing your monthly burden and making it more manageable.

How to Approach the Conversation

When you’re facing financial difficulties and need to negotiate with your creditors. Starting the conversation effectively can make a big difference. Begin by reaching out early and clearly explaining your situation.

Reach Out Early: Don’t wait until things get worse. Contact your creditor as soon as you realize you’re going to miss a payment. The sooner you reach out, the more options you might have.

Explain Your Situation: Be upfront about your financial difficulties. For instance, you might say, “I’m facing a temporary financial setback and can’t make this month’s payment. Can we discuss options like a payment holiday or adjusting the payment plan?”

Propose Solutions: Offer a feasible plan based on your situation. Whether it’s requesting a temporary reduction or extending your payment term, show that you’re committed to resolving the issue.

Get Everything in Writing: Once you’ve reached an agreement, make sure to get the terms in writing. This avoids misunderstandings and ensures both you and your creditor are on the same page.

Follow Through: Stick to the new plan and make payments as agreed. Demonstrating reliability can help you rebuild trust with your creditors and improve your financial situation.

By reaching out and negotiating with creditors, you can often find solutions that make managing missed payments easier. It’s a proactive step that can provide relief and set you on a path to recovery.


Conclusion

Missing a payment might seem like a small mistake, but it can lead to big problems for your credit. The good thing is you can fix it and come out stronger. By addressing missed payments quickly, setting up a solid plan, and building good credit habits, you can turn things around.

Remember, everyone faces financial bumps along the way. Missing a payment doesn’t mean you’re stuck. It’s a chance to make things right and improve your future.

Need a hand with your credit?

Our credit repair app is here to help. We offer easy tools to manage your credit and track your progress. Don’t let missed payments hold you back. 

Start your free trial today and take the first step towards better credit!


Joe Mahlow has over 16 years of experience in the Personal Finance and Credit industry. He has successfully run a credit repair business and is the founder of Disputely, a credit repair software. Joe is passionate about helping clients improve their financial knowledge and build wealth. His goal is to guide people to financial success using his extensive experience and expertise.

Joe Mahlow

Joe Mahlow has over 16 years of experience in the Personal Finance and Credit industry. He has successfully run a credit repair business and is the founder of Disputely, a credit repair software. Joe is passionate about helping clients improve their financial knowledge and build wealth. His goal is to guide people to financial success using his extensive experience and expertise.

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