How Can Late Payments Impact Your Credit Score?

A credit score forms one of the most fundamental measures of an individual’s credit management debt repayment history. Credit scores are usually given out by major credit bureaus like TransUnion, Equifax and Experian. In India, credit scores can be obtained through the Credit Information Bureau India Limited (CIBIL). The score ranges from 300 to 900. The base limit for a good credit score is 700. Banks and Non-Banking Financial Companies rely on the CIBIL credit report to assess the credit history of an individual along with their utilization ratio and loan-related transactions.

A credit bureau is usually informed of a cardholder’s payment details based on a code sent by the lender which ranges from one to nine. If a cardholder is successfully able to clear the dues within a 30-day billing cycle, a rating of ‘1’ is awarded to them. A rating of ‘2’ would indicate a late payment by 31-59 days and so on. The delayed payment is viewed by how recent the event is, and the severity and frequency of the occurrence.

Your credit score is differentially affected based on the number of days by which the delay of payment has occurred. However, delayed payments have a lesser impact on your credit score as opposed to being defaulted. A defaulted credit would mean that you failed to meet the terms of the lender and missed out on multiple payment cycles, thereby adversely affecting your credit score. A low score of this nature reflects poorly on your ability to make timely repayments.

One’s credit score might not be the only factor that decides the approval for a credit application but it is a crucial parameter. An applicant’s score, however, could influence the size of loan that they would be eligible to avail and the rate of interest as well. A poor score could invite lesser loan opportunities and an increased rate of interest. In case of a home loan, for instance, a higher interest over a long tenure could possibly mean repayment of an amount much higher than the principal. The increased rate of interest is a way in which the lender compensates for taking the risk of providing credit to a person with low credit. It could also prove to be especially challenging to apply for unsecured credit. Check here for free Credit Score.

Delayed payments are often accompanied with a fee that is charged as penalty. In case of a loan, delayed EMI payments can prove to be injurious to your credit score and your chances of availing future credit. A borrower with a score of 780, for instance, could suffer a 100-point drop in their credit score after missing the 30-day mark on loan repayment. However, a person with an average score of 680 would experience a 60-80 point drop. Hence, a good score is the most affected by a late payment rather than an average score. One late payment or missed EMI can bring down your score drastically.

The following are a few measures that one can take to improve their credit score:

• Plan your budget in order to immediately pay off the pending dues.
• Choose a repayment plan based on your financial condition, Snowball method i.e. clearing off smaller debts before moving on to larger debt amounts or Avalanche method i.e. paying off the largest debts before settling the smaller dues.
• Setting up automatic payment methods could be an alternative to assure timely payments.
• Ensuring that your utilization rate is within 30% of your credit limit.
• Regular review of credit report to keep track of transactions and credit score developments