What is a Credit Score?

The credit score of an individual is their ability to pay back any loan. The score derived statistically based on the person's credit history.

Several parameters contribute towards a credit score, which falls within the good to satisfactory category. These parameters include the following:

  • Credit amount
  • Timelines of credit repayment
  • Type of credit: Loan Against Property, Gold Loan, Credit Card, Personal Loan, Home Loan, and so on.
  • Borrower's performance across all the credit lines

While a good credit score indicates the positive financial health of the borrower, a poor credit score does quite the opposite.

Banks, financial institutions, and several other funding bodies assess an individual's financial ability to repay the loans based on their repayment history indicated by the credit score.

Late Payment Factors That Impact Your Credit Score

The extent of the impact of late payments on the credit score depends upon two major factors. These are:

How late was your payment?

In most cases if the repayment is just a day late, the lender is likely to let it pass without a fine or reporting.

When repayment is delayed by a week to 10 days it is likely that some late fee or interest be charged on the repayment amount. At the same time, the lender may still not report the case to CIBIL or any other reporting agency.

However, if there is a delay in payment of more than 30 days, you will not only be fined but the lender will also report the case to the agency.

Are you a habitual defaulter when it comes to loan repayments?

If your credit history shows you habitually default repayment instalments, lenders will definitely be wary of you. Based on the frequency of default repayments, borrowers are categorised as follows:

  • Major defaulters: These are borrowers with delayed payments of over 90 days. Major defaulters are also those who defaulted on payments leading to their accounts being termed as Non-performing Assets (NPAs), or those whose loans were written off, or the property was repossessed.
  • Minor defaulters: These are borrowers with delayed or missed payments for fewer than 90 days.

Impact of Late Payments on the Credit Score

Payments late by 30 to 60 days might not necessarily have a lasting impact on one's credit score although one might have to incur a late fee and fines. Such delays go unreported on the credit report unless they get repetitive and frequent in nature.

It is important to know that any payment delayed by more than 90 days can negatively impact your credit score for up to as long as seven years. For anyone who delays payments over 90 days is considered an offender who may possibly repeat the incidence. 

Once endorsed in your credit report a delayed payment can affect your credit score as follows:

Delay in Payment in Days Impact on Credit Score

Late by 30 days

  • Will be endorsed in credit report only if frequent
  • Single entry does not have a lasting impact on credit score

Late by 60 days

  • Will be endorsed in the credit report
  • Single entry does not cause a lasting impact on credit score
  • Frequent entries have long term impact on credit score

Late by 90 days

  • Will be endorsed in the credit report
  • Banks consider defaulters in this category as those likely to repeat
  • Negatively affects credit score for up to seven years
  • Credit score drops

Late by 120 days or more

  • So much delay leads to debt being 'charged off' for third-party collection usually managed by external agencies
  • Both delay and debt being charged off is endorsed in the credit report
  • Drastic fall in credit score. Not easy to recover from

CIBIL scores range from 300 to 900 on a scale of bad to good. An ideal credit score is 700 or above. 700 is said to be good in case of secured loans, while unsecured loans require a credit score of 750.

CIBIL Score What it Means

CIBIL Score between 700 - 900

 

  • Credit Score - Excellent
  • Borrowers get loan easily
  • Can expect concessions in charges and interest rates

CIBIL Score between 700 - 750

 

  • Credit Score - Good
  • Borrowers get loans after credit appraisals as per bank policies

CIBIL Score between 550 - 700

 

  • Credit Score - Not So Good/ Fair
  • Indicates irregularities in repayment
  • Lending bodies show skepticism in lending without collateral

CIBIL Score between 300 - 550

 

  • Credit Score - Poor
  • Indicates write-offs and settlement of account in credit report records
  • Very difficult to get a loan

How Does a Low Credit Score Affect the Borrower?

Late payment of one's Credit Card dues or any loan equated monthly instalments (EMIs) directly impacts one's credit score even if it happens once. As mentioned above, lending institutions evaluate an individual's credit risk based on a person's payment history. This factor helps them decide whether someone is worth lending the money to or not. 

A long-term history of timely payments confirms the reliability of the individual as a borrower. On the other hand, a history of defaults and delayed payments indicates that the borrower might not be in the position to repay the loan and might end up being an expensive investment for the bank/lending body. Late or non-payments result in negatively influencing the credit history, thereby decreasing an individual's credit score.

A low credit score is a red alert sign for financial institutions and banks that deem the borrower unreliable. Here is how a low credit score affects the borrower:

  • Late fee: The borrower is charged a fine/late fee for delaying the payment and the same is reflected in the next statement. The amount keeps increasing with the frequency of delays.
  • Increase in interest rates: Frequent delay in repayment of loan often results in lenders increasing the interest rate.
  • Negative indication in the credit report: Habitual defaulters force the lending bodies to notify the credit bureaus of the delays, which eventually are reflected in the individual's credit report. This entry stays on the report for up to seven years and negatively affects the score.
  • Poor credit score: A negative credit report leads to a fall in credit score. This is because information related to repayment history accounts for 35% of an individual's credit score. As a result, it is a major factor contributing towards how the score will be like. Therefore, even a single bad credit report can bring down an excellent or good credit score to satisfactory or poor.
  • 'Charging off' of the account: Habitual delays in payment can lead to the account being charged off for recovery through external agencies and permanently tarnish the image of the borrower for years to come.
  • Difficulty in getting new credit: A poor credit score indicates a borrower's defaulting nature and warns off other lenders from lending to the individual. As a result, if you default on one it gets increasingly difficult to get a loan from other instruments/banks/lending bodies as well.
  • Credit score damage might be irreparable: When a lending body reports non-payment, it gets updated in the bureau records and stays there until further updated intimation on the same is received from the banks. That is why it takes years to recover from this, often tarnishing the borrower's reputation forever.
  • Delays prove to be very expensive: Delay or non-payment of loans often leads one into heavy penalties and late fees. Lenders continue to charge these and high interests for years to come until all dues are cleared. This makes the default very expensive for the borrower.

How to Avoid Late Payments?

In order to maintain a good credit score it is wise to remember that since all transactions and payments against your loan or Credit Card are recorded, always make timely payments, much before the due date.

Here are some tips to ensure you stay on track with your repayments and never miss them:

  • Create reminders: You can use online organisers, planners, or mobile alerts to help yourself remember the due date. In fact create two alerts - one set for a week before the due date to remind you to get the funds ready and another a day before the due date to remind you to make the payment. If technology is not your thing, assign the task to a staff member, partner, or friend to remind you well in time. You can also enable the automatic reminder services, which most creditors offer to avoid delays.
  • Auto-pay and Auto-deduct options: This is a very helpful option for someone who simply forgets to pay on time, but has the funds in place. It means that the borrower authorises the lending institution/bank to auto deduct the monthly amount due from his/her account on a said date every month. When you opt for this option, make sure you have the adequate funds required in your bank for the payment before the due date to avoid a late fee or fines.

How to Recover from a Late Payment?

If you have defaulted on a payment and are wondering how to recover from it, try these methods:

  • First of all, start paying all your accounts on time to build back that reputation. Also, once you start paying on time slowly after a few months, your credit score will start improving.
  • Request your lender to remove or reduce the late payment penalty fee. Most banks consider this if someone is a first-time defaulter and has otherwise had a good relationship with the bank.
  • Late payments often result in an increase in the interest rate as a penalty. Try to convince your issuer to reset your interest rate back to normal if you make timely payments for the next six or eight months.
  • You must make an effort to keep a check on your credit score and financial health from time to time. Use a free CIBIL Score calculator or get your Credit report for free so that you are aware of your payment history. This helps one analyze the pitfalls and not make the same mistakes again.

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