How do late payments affect your credit score?

Published: July 10, 2018 3:37:26 PM

Lenders often advise against paying late - the most prominent reason being the negative impact it has on your credit score. Here's how it will impact you.

credit score, credit report, impact of late payments on credit score, credit card, home loan, cibil scoreA good credit score is indicative of responsible credit management, and lenders look at this parameter very seriously while processing your credit application.

Have you made any late payment on your loan/ credit card recently? If yes, you’d certainly be wondering the extent of damage it’d have on your credit score, wouldn’t you? Lenders often advise against paying late – the most prominent reason being the negative impact it has on your credit score. But how severe can late payments really be? Can a few peppered instances over a set period, say about 2-3 instances in a year, cause serious damage? Well, let’s find out!

Before we begin, we cannot ignore the difference in impact between late payments and defaults – defaults can have a far more overbearing impact on your credit score, while the effect of late payments isn’t that extreme. It’s quite simple actually – a late payment still means you’ve paid up, very much in accordance with your obligation, while defaulting means you’ve blatantly missed the payment for the given month, much against the terms you’ve agreed to before borrowing. That said, late payments certainly have an impact on your credit score.

A good credit score is indicative of responsible credit management, and lenders look at this parameter very seriously while processing your credit application. Especially in the case of unsecured loans, considering they don’t involve any form of collateral, using the credit score as an essential means to assess an individual’s creditworthiness has become immensely important in recent times. For all that’s said, the credit score essentially serves as the single most dominant parameter that influences approval/rejection of a credit application. Credit scores as such don’t just influence approval or rejection, they also influence the quantum of loan amount offered and the interest rate on a particular loan application – the better the credit score, the lesser the interest offered and the higher the amount approved (note: the quantum of loan amount offered is also dependent on current debt obligations and the individual’s income).

Technically, the importance of maintaining a good and healthy credit score cannot ever be understated. A serious blemish can affect approval chances for prolonged periods of time – for instance, even one instance of default is enough to result in all your loan applications being rejected for at least the next one or two years (yes, that’s how serious it can get).

But still, this question is often posed, and individuals sometimes wonder if just one instance of late payment can jeopardize all future loan applications, be it secured or unsecured? Let’s try and answer this. Say, you want a home loan. For home loans especially, banks evaluate CIBIL records for at least the last 3-4 years, and multiple instances of late payments and a handful of defaults will result in auto-rejection of your application by top private banks. So, technically, you won’t face outright rejection across the market – there will be lenders offering you home loans, but at a much higher interest rate – something that you don’t want, as in the case of home loans, your interest payments over a 20 year tenure will be more than your principal! Surprising as this may sound, welcome to the world of interest!

Be it credit cards, unsecured loans or secured loans, late payments always come with a penalty – i.e. if the monthly repayment amount isn’t paid by the due date, a penalty amount is levied. How much a late payment is going to impact your credit score depends on the type of credit product you’ve availed. As for credit cards, late payment by a few days won’t cause too much damage but in the case of loans (unsecured or secured), if your NACH is active, there can be trouble, for EMI bounces can significantly hurt your credit score and affect your approval chances for future loans.

A recent detailed analysis of impact on CIBIL scores as a result of late payment determined that a 30-day delinquency can bring down credit scores by a whopping 100 points. The impact is more for good scores than it is for average scores. Speaking of which, if you already have a good credit score and make a late payment you’re in for more damage than if your score was average before paying late. Technically, paying your EMI late even by one day is going to have an impact – the more the delay, the more the impact.

(By Aditya Kumar, Founder & CEO, Qbera.com)

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