When you think of a credit score, you might think of a three-digit number that lets you know how you’re doing financially. However, credit scores are a bit more nuanced than that. More than just a record of your financial record, credit reports also play key roles in some of life's most important milestones — be it the desire to own your home or trying to land your dream job.
Your credit report plays a foundational part in your most important personal finance decisions, and its role in shaping financial trajectories cannot be understated. So, it's only natural to feel concerned when late payments cast a shadow over this essential document.
Before you can address any delinquency on your report, we first need to understand the consequences of late payments and the steps you can take to remove them.
How do late payments impact your credit score?
The influence of late payments on credit scores is undeniable, as they make up the largest percentage of your credit score. Leading credit scoring models, including FICO scores and VantageScore, heavily rely on payment history to determine your overall score. Just a single missed payment can cause a significant ripple effect on your credit score.
Everyone from credit card issuers to mortgage lenders looks closely at your credit score and payment history to measure your financial reliability. Therefore, late payments can be seen as major red flags and may suggest some extra risk when it comes to lending.
The consequences? You may face steeper interest rates, lower credit limits, or have your application outright denied. Money lenders don’t like taking risks, and bad credit due to reported late payments is about as risky as it gets from their perspective.
How do credit bureaus track and record late payments?
When it comes to documenting your financial behaviors, the three major credit bureaus — Experian, Equifax, and TransUnion — are at the forefront. Functioning as the chief custodians of credit histories, they gather and compound data relayed by credit card companies, lenders, and various other financial entities.
As mentioned earlier, payment history is central to their calculation. This segment records the punctuality and consistency of payments, capturing both the timely payments and the lapses. It stands as a testament to a borrower's financial discipline and reliability.
Given the weight this section holds (35% of your overall FICO score), any negative information on your credit file, like late payments, can dramatically affect your ability to secure credit favorably in the future.
Are there ways to prevent late payments?
The cornerstone to maintaining a healthy credit score is ensuring that all payments on your credit accounts are made on time, every time. While unforeseen circumstances can sometimes throw a wrench in one's financial planning, there are several strategies that you can employ to reduce the risk of missing a payment.
Automatic payments
By enabling this function, your monthly payments (credit card, mortgage, auto loan, student loan, etc.) are automatically deducted from your bank account on a set date. This ensures that bills are paid promptly without you having to remember to pay them. Just be sure you always have enough in your checking account, so that you don’t get stuck with fees.
Set reminders
In our busy lives, it's easy to forget a due date. By setting reminders on digital platforms like calendars or dedicated phone apps, you can receive timely notifications that nudge you when a payment due date has arrived.
Know your minimum
It's always ideal to pay as much toward your credit card balance as possible each month. However, in situations where this isn't feasible, knowing and paying at least the minimum amount is crucial. Making the minimum payment can help in avoiding additional late fees and prevent the payment from being reported as late to the credit bureaus or, worse, sold to a collection agency.
Can you dispute inaccurate late payments?
If you think there is an incorrect late payment on your credit report or any inaccurate information for that matter, you can absolutely dispute it. For example, if you’re a victim of identity theft, then you should immediately review your report and check in with the credit bureaus.
The Fair Credit Reporting Act (FCRA) is a significant piece of legislation that grants consumers the right to dispute and correct inaccuracies on their credit reports. It’s also the reason why you can have access to a free credit report instead of having to pay to review it.
The first step to dispute any potential issues is drafting a clear and concise dispute letter and forwarding it to the concerned credit reporting agency. Upon receiving your dispute, these agencies are obligated by law to investigate the claim within a 30-day period. They’ll review your claim and work to ensure that your credit report only contains accurate information.
Adding another layer of consumer protection, the Consumer Financial Protection Bureau (CFPB) diligently monitors credit reporting agencies, ensuring they remain compliant and act in the best interest of the consumer. If you suspect that may not be the case, you can speak directly to the CFPB and file a claim.
Lastly, in cases where a late payment is indeed accurate but an anomaly or the first time in an otherwise punctual payment history, individuals can approach their creditor with a goodwill letter. This letter serves as a humble request, urging the creditor to consider removing the derogatory mark via goodwill adjustment and acknowledge the context of their previous on-time payments.
What should you know about credit repair companies?
Navigating the realm of credit repair can feel a bit like a financial minefield. While there are legitimate credit repair companies that can help individuals improve their credit histories, the industry does include less legitimate companies that exploit desperate consumers.
It's vital to proceed with caution. Before committing to any credit repair service, conducting thorough research is extremely important. Look for reviews, testimonials, and any red flags that indicate a potential scam.
Transparency in fee structures and a clear outline of services provided are signs of a reputable company. On the other hand, promises of quick fixes and guarantees of drastically improved credit scores in an unrealistically short timeframe should be viewed with a healthy dose of skepticism.
Can on-time payments offset the impact of past due ones?
Absolutely. While past-due payments can be a setback in your credit journey, it's essential to remember that credit scores are dynamic and can change based on recent behavior. Not only that, but the late payment will fall off your credit report after a period of seven years.
Every on-time payment you make can chip away at the negative impact of past mistakes. Over time, with a string of consistent and punctual payments, the severity of those past-due payments decreases in the eyes of lenders and credit bureaus.
In addition, focusing on other aspects of your credit health, like keeping credit card balances low, can help improve your credit. Reducing your credit utilization — the ratio of your credit card balance to your credit limit — for example, you not only demonstrate financial responsibility but can also positively impact your credit score.
How can Vital help you improve your credit health?
Vital Card is designed with the modern consumer in mind, recognizing the importance of credit health in today's credit landscape. Our platform promotes and rewards responsible spending, advocating for timely credit card payments that can support your credit score.
When consumers engage with Vital, they aren't just dealing with another credit card issuer; they're actively participating in a system that values, supports, and encourages responsible financial behavior.
The balance of spending and financial discipline offers a holistic approach to credit monitoring and management.
The bottom line
Your credit report isn't merely a statement of past financial actions; it's a continually evolving narrative of your financial habits, decisions, and resilience. While missteps like late payments can cast a shadow, they don't determine the whole story.
Through informed financial decisions, diligence, and platforms like Vital you can make financial decisions that help your credit, not harm it. Embracing tools and platforms that prioritize credit health can set the stage for long-term financial prosperity.
Join Vital Card’s waitlist today to get started.
Sources
How Can Your Credit Score Affect Your Life | Experian
Fair Credit Reporting Act | Federal Trade Commission
Sample Letter for Disputing Credit and Debit Card Charges | FTC Consumer Advice
How Do Credit Repair Companies Work? | Experian
How Can I Tell a Credit Repair Scam from a Reputable Credit Counselor? | Consumer Financial Protection Bureau
The Complete Guide to Understanding Credit Scores | Experian
Disputing Errors in a Credit Report | National Consumer Law Center
Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.