Credit Score: How late payments can ruin your financial reputation | Mint

A credit score is very important while applying for credit cards or loans as it plays an important role in determining your eligibility. This score indicates your creditworthiness which helps the lender determine the risk in offering you a loan. 

If you pay your EMIs and bills on time it will help gradually increase your credit score. Otherwise a single missed payment may bring it down. Let us understand how late payments can affect your credit score.

Understanding late payments

Lenders provide you with some time within which you are expected to pay back the loan or the credit card bill. Failing to meet this deadline leads to inclusion of the delayed payments in CIBIL report. If a payment is missed or delayed, the credit score decreases. You must note that post this, it will take a considerable amount of time to regain your credit score.

This is nearly always viewed as a negative aspect by the lenders as they analyze your eligibility for the specific loan or credit card. Many lenders consider this as high-risk as it reduces the guarantee of getting the amount back in time. On the other hand, early payments give lenders confidence that you are capable of repaying the loan within the specified time.

Lenders have a specific criteria on penalties against failure to repay the EMIs. In the case of credit card bills, if you fail to repay on time, the interest rate will be added to the amount with every consecutive day. It is important to note that the interest rate on credit cards is even higher than that of a personal loan.

Impact of late payments on your credit score

Negative impact on credit score: A single missed payment reduces the credit score and in turn limits your chances of getting a future loan or a credit card.

Credit report reflection: Late or missed payments also remain on the credit report for a minimum of 36 months and portrays you with poor borrowing habits.

Minor defaults: Payments due but not yet overdue, that is, payments that are less than 90 days past due. These reduce your credit score although they can become better again if payments are resumed on time.

Major defaults: Any amount of payment outstanding for a period of more than 90 days are categorised as non-performing assets (NPAs). These substantially lower your credit score, getting back to 750+ becomes tough, and your creditworthiness decreases.

Multiple defaults:In case of multiple loans existing and you fail to make timely payments in more than one EMIs, your credit score will be drastically impacted.

Conclusion

If you want to avoid such late payment charges and want to stay consistent with your credit score, then consistency is the key. You need to ensure that you stay ahead of your bills and always pay credit card bills in one go rather than paying a minimum amount so that you can avoid unnecessary burden.

To ensure that you have your finances in line for loans, it is advisable that you use an EMI calculator to take a note of your EMIs and how much burden you will be incurring post the loan. You should make sure that you always borrow the amount which is capable of repaying and not take any extra amount which can lead you to any debt traps.

You should always remember that credit scores can get worse easily, however, making them better will take a lot of time and consistency. Hence, make sure you always consider all aspects and make informed decisions.