So you've missed a payment: Now what?
By Georgie Miller
So, your finances are a little tight this month. You're probably worried and wondering what to do. Perhaps you've investigated all of your last-ditch solutions for cash emergencies, but you're still going to come up short on an obligation or two. What happens next?
What happens to your credit score when you miss a payment
Payment history comprises 35 percent of your credit score, according to myFICO.com. This is the biggest single factor in your FICO score! The next most heavily weighted category is amounts owed, at 30 percent of your score.
Since payment history is such a significant component of your FICO score, missing payments can cause quite a dip in your rating. Fortunately, if the rest of your credit history is positive, then one or two missed payments shouldn't spell disaster.
The reason payment history is so important is that creditors like to know they will be paid (which is not too surprising). If you have a history of not making payments on time, then creditors may decide you are too risky. As a result, they may not offer you new credit, or they may charge you a higher interest rate than someone with a history of making payments on time.
In other words, you can probably kiss offers for low-interest credit cards and zero-percent introductory periods goodbye.
What happens to your status with your creditor when you miss a payment
The consequences of your late payment may vary depending on the type of account you were late on. For example, some utilities (such as your electric company) may not report to credit bureaus unless your account becomes so delinquent that you are sent to collections. If you resolve the payment issue before being sent to collections, then you may be able to avoid the dreaded credit ding.
If you are sent to collections, however, that activity remains on your account for seven years. Plus, there may be additional consequences, such as having your service discontinued or having to pay a reconnection fee. If you miss a payment on an installment loan like a car loan or a mortgage, then your car could be repossessed or your home foreclosed on.
Credit cards work differently. If you miss too many payments, then your interest rate may be increased or you may be assessed a late fee -- or both. The Consumer Financial Protection Bureau's CARD Act Fact Sheet gives more information on the consequences credit card companies are allowed to impose on those who miss payments. While the CARD Act has improved many consumer protections, you may still experience penalties.
What to do if you miss a payment
You should contact your creditor as soon as you know it is likely that you are going to miss a payment. If you are proactive and do this before your payment is late, the company in question may have options you're unaware of to keep your account in "current" status (as opposed to "delinquent"). Sometimes there's nothing they can do to prevent the payment from being reported as late to the credit bureaus. However, your creditor may be able to tell you how to get your account back into good standing the fastest and minimize the negative consequences associated with late payment.
The next thing to do is analyze the problem so you can prevent it from happening again. Maybe you have an issue with an unsteady cash flow. If that's the case, take steps to make sure you're stashing some funds in an online savings account so that in the future, there's money there when you need it. Or maybe you need to find a way to earn more. Facing your financial issues head-on can be daunting, but finding a long-term solution that's going to work for you is crucial.
In the short-term, resolve whatever issues were caused by your late payment. If necessary, take the essential steps to escape your debt. Then make your payments to every account and creditor on time, every time going forward.