Your credit report plays a crucial role when you apply for loans or credit cards. A low score can potentially have a negative impact on loan approvals. TransUnion CIBIL™, one of India's leading credit bureaus, assesses your creditworthiness based on various factors, including missed or timely payments. In this article, we will learn how missing one payment affects credit score and explore strategies to improve it.
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How a Missed Payment can Affect Credit Score?
To answer the question of how a missed payment can affect your credit score, you must understand everything about a missed payment. A missed payment refers to the failure to repay credit card bills or loans by the due date. These late payments are recorded in your credit report and have an immediate negative impact on your credit score. A single missed payment can stay on your credit report for up to seven years.
When you miss a payment, there is an immediate dip in your credit score and may take some time to rebuild even after you start maintaining good credit habits. Note that recent missed payments have a stronger impact than older ones. Missed payments impact a borrower's eligibility for loans or credit cards because lenders consider them to be highly risky. On the other hand, timely repayments have a positive impact on your credit scores and assure lenders that you can pay back their debts on time. You must avoid late payments to strengthen your credit history.
What are Minor and Major Defaults?
Payment defaults are categorised as minor or major depending on the duration of the delay. Below we discuss some key defaults and their impact on credit scores for missing a single payment:
- Though minor, these defaults have the potential to damage your credit score. These are said to have occurred when payments are missed or delayed for less than 90 days. Although they are considered less severe, they still have a temporary negative impact on your credit score.
- Major defaults occur when payments are made after 90 days. These defaults have more severe consequences and can significantly impact your credit score. Such defaults damage your creditworthiness as well as affect your loan and credit card approvals.
How to Improve Credit Score?
A healthy credit score is an important requirement to assess your creditworthiness when you apply for loans or credit cards. Here are some strategies to improve your credit score
Pay Outstanding Debts
Your payment history has a significant impact on your credit score. Ensure to make all your credit card and loan payments on time to avoid late fees and negative impact on your credit score. You must avoid late payments to strengthen your credit history, besides setting up reminders for timely payments. Such responsible financial behaviours will not impact your credit score negatively.
Keep a Low Credit Utilisation Ratio
Your credit utilisation ratio is the percentage of your available credit limit that you are currently using. Aim to keep this ratio below 30% as it helps improve your credit score.
Avoid Multiple Credit Applications
Each time you apply for new credit, it gets recorded in your credit report and may negatively impact your credit score. Avoid applying for multiple credit cards from various credit card issuers within a short period as it can make you appear dependent on credit.
Do Not Close Old Credit Card Accounts
The length of your credit history affects your credit score. Keeping old credit accounts open demonstrates a long credit history, besides showing responsible borrowing. This can positively impact your credit score.
Check for Errors in Your Credit Report
Regularly review your credit report to identify any errors or discrepancies that could harm your credit score. If you find any inaccuracies, file a dispute with the credit bureau and get them corrected.
Maintain a Diverse Credit Mix
Having a variety of credit such as credit cards, personal loans, and home loans reflects your ability to handle different types of debt responsibly.
Resolve Late Payments
In case of late payments, it is crucial to resolve the situation as soon as possible. You must avoid late payments for any outstanding debts to minimise their negative impact on your credit score.
Make Timely Credit Repayment
Consistently making timely payments is key to maintaining a good credit score. Avoid late payments and pay attention to payment due dates to show responsible credit behaviour.
What happens if I miss a payment?
Missing a payment can have several consequences that affect your financial well-being.
Fall in Credit Score
If you miss paying bills on time, it can lead to a decrease in your credit score. Your payment history is an indicator of your creditworthiness. Hence, there can be a severe impact on credit score for missing a single payment.
Late Payment Fees
If your payment remains overdue for 30 days or longer, failing to meet the due date could result in late payment fees and accrual of extra interest charges. These expenses accumulate over time, ultimately raising your total payment amount.
Difficult to get a loan
Missed payments make it difficult to get a loan in the future. Missed payments may seem like a sign of financial instability, making credit card issuers or any lenders less likely to give you credit.
High-Interest Rates
Missed payments make borrowing money more expensive because lenders charge a high interest rate which further affects your financial well-being.
Negative Impact on Your Credit Report
Missed payments affect your credit report for the long term. The damage to your credit score reflects on your credit report for up to 7 years.
How Can I Avoid Making Late Payments?
Avoiding late payments is necessary for maintaining a good credit score. Here are some effective strategies
Use Auto Debit
Set up auto debit for bill payments that are to be paid every month. Banks and financial institutions provide this facility to their customers to pay for credit card bills and loan EMIs (equated monthly instalments).
Set up Payment Reminders
Use calendar or reminder apps to set up reminders for payment due dates. This will help you remember when your bills are due. Pay your bills on time to avoid any late payments which in turn can have a negative impact on your credit score.
Rework Your Payment Plan with Your Lender
If you are facing difficulty in making payments, request your lender to rework your payment plan or adjust the due date to help you avoid late payments.
Convert Outstanding Payments into EMIs
Convert outstanding payments into monthly instalments. This will help you make timely payments in an organised manner.
Conclusion
To avoid impact on credit score for missing a single payment follow the best practices outlined by CIBIL™. Maintain healthy financial habits by keeping track of your expenses, and spending within your credit limit. Take charge of your financial well-being by following responsible borrowing habits and considering Shriram Finance for your credit needs. Your credit score is a financial compass that guides your access to various loans and credit cards. Learn more about the business loans that Shriram Finance offers. Click here to apply.
Key Highlights
- Timely payments are essential for maintaining a good credit score.
- Missing or delaying payments can lead to significant drops in your credit score.
- Improving your credit score requires maintaining a low credit utilisation ratio and checking your credit report for errors.
- Missed payments can lead to higher interest rates and difficulty in securing credit.
FAQs
1. If I miss out on paying my credit card bill, will that impact my credit score?
Missing a payment on your credit card bill can have a negative impact on your credit score. It is important to make payments on time to maintain a good credit score.
2. How long does it take to recover from one late payment?
The impact of a missed or late payment can stay on your credit record for up to 7 years. However, with continuous timely payments, the negative impacts start to fade away over a long time.
3. Can a single bounced check impact one's credit score?
If the bounced cheque leads to missed payments or unpaid debts, it can negatively impact your credit score.
4. Can you have a 700 credit score with late payments?
Having late payments on your credit record can make it challenging to achieve a 700 credit score.
5. Why has my credit score dropped 100 points for one late payment?
Late payments are viewed as a sign of financial insecurity by lenders and can result in a significant drop in your credit score.
6. Do failed payments affect the credit score?
Failed payments, such as bounced cheques or returned direct debits, can indirectly affect your credit score if they lead to missed payments or unpaid debts.
