Rebuilding After Missed Payments

Missing a payment is common, and it is not the end of your credit story. It does leave a mark, and the size of that mark depends on how late the payment was, how recently it happened and what the rest of your history looks like. This guide explains what happens after a missed payment and the steady steps that can help your credit history recover over time.

What happens when a payment is missed

The timeline usually unfolds in stages:

• Right after the due date. The creditor may charge a late fee. Your card agreement lists the amount.
• At 30 days past due. Creditors generally can report the payment as late to the credit bureaus once it is 30 or more days past due. A payment caught up before then is usually not reported as late, although the fee may still apply.
• At 60 days past due. Many card agreements allow a penalty APR, a higher interest rate, to apply.
• At 90 days and beyond. The account may be reported as seriously delinquent. Eventually it may be charged off, and it may become an account sent to collections.

The most useful takeaway from this timeline: if you have just missed a due date, paying at least the minimum as soon as possible, ideally before 30 days pass, may prevent a late mark from being reported.

How late payments affect your credit

Payment history is the largest single factor in FICO scores, making up about 35% of the score. A recent late payment can lower scores noticeably, and a 60- or 90-day late payment typically has a larger effect than a 30-day one.

Two facts help keep this in perspective:

1. Time matters. The effect of a late payment usually fades as it ages, especially once newer on-time payments are added.
2. Reporting has a limit. Under federal law, most late payments can stay on your credit reports for up to seven years from the date of the original delinquency. After that, they should drop off.

Step 1: Get current and stay current

The first priority is to bring every account up to at least the minimum payment. Then protect that progress:

• Set up autopay for at least the minimum on every account.
• Move due dates, if your issuer allows it, so they fall a few days after your paycheck arrives.
• Add calendar reminders three days before each due date as a backup.

If you cannot catch up on everything at once, contact each creditor to explain your situation and ask what options are available. Get any arrangement in writing.

Step 2: Check your credit reports

You can get free reports from Equifax, Experian and TransUnion at AnnualCreditReport.com. Review each one for:

• Late payments you do not recognize, or that list the wrong date or severity.
• Accounts that are not yours.
• Balances or credit limits that look wrong.

If something is inaccurate, you have the right to dispute it directly with the credit bureau and with the company that supplied the information, at no cost. The FTC’s guide on disputing errors includes sample letters.

If a late payment is accurate but was a one-time slip on an otherwise strong record, some people write to the creditor and ask for a goodwill adjustment. The creditor is not required to agree, and many decline, but it costs nothing to ask politely.

Step 3: Bring card balances down

Credit utilization, the share of your card limits you are using, is another major scoring factor. Lowering it is one of the ways recovery can show up relatively quickly, because it is based on current balances rather than past events.

A worked example

Suppose you have one card with a $3,000 limit and an $1,800 balance.

• Current utilization: $1,800 ÷ $3,000 = 0.60, or 60%.
• If you pay the balance down to $900: $900 ÷ $3,000 = 0.30, or 30%.
• If you pay it down to $300: $300 ÷ $3,000 = 0.10, or 10%.

Lower utilization is generally viewed more favorably. You can check your own figures with the credit utilization calculator.

There is also an interest benefit. At a 24% APR, the $1,800 balance costs about $1,800 × 0.24 ÷ 12 = $36.00 in interest per month. At $900, that drops to about $900 × 0.24 ÷ 12 = $18.00.

Step 4: Add positive history slowly

New on-time history is what gradually outweighs older late payments. Some ways people add it:

• Keep existing accounts open and in good standing, using a card lightly and paying in full when possible.
• For those with few accounts, a secured card, which uses a refundable deposit as the credit limit, can be one way to build history. Confirm it reports to all three bureaus.
• Avoid opening several new accounts at once, since each application can add a hard inquiry.

What to avoid

Some companies charge upfront fees and promise to remove negative items from credit reports. Accurate information cannot legally be removed before its reporting period ends, and you can dispute genuine errors yourself for free. Be cautious of any company that tells you to create a new identity for credit purposes or to dispute accurate information. The FTC warns that these practices can be illegal.

If you are struggling to keep up with several accounts, a nonprofit credit counselor can review your budget with you at little or no cost.

Next steps

• See how your balances compare to your limits with the credit utilization calculator.
• Learn to read each section of your report in How to Read Your Credit Report, Section by Section.
• Build a reminder system with How to Never Miss a Due Date.
• Find more support in the Financial Fresh Start section.