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How Do Late Payments Affect Credit Score

Last editedApr 20222 min read

Paying bills on time is one of the easiest ways to maintain your credit score, so what happens when you make a late payment? While a single delayed payment may not have a big impact, a history of delayed or missed payments could cause it to plummet. How do late payments affect your credit score? Here’s a closer look at how the system works.

How are credit scores calculated?

The primary goal of a credit score is to assign a level of risk to those seeking credit. To better understand the impact of late bill payment on credit scores in Australia, it helps to first look at how your score is calculated. It’s formulated by Australia’s main credit reporting agencies, including Experian, Equifax, Veda, and Illion. Credit bureaus score in different ways, but they’ll take a similar approach, factoring in:

  • Past and present debts

  • Credit limits

  • Credit cards and store cards

  • Business and personal loans

  • Age oflines of credit

  • Default judgments or history of bankruptcy

Australia has recently switched to comprehensive credit reporting (CCR) which allows banks to share positive customer data with credit agencies. This creates a more holistic view of a customer’s borrowing and repayment history – which means late payments now matter more than ever.

While a payment qualifies as late as soon as it’s a day overdue, with CCR late payments are reported on your credit file when they’re 14 days past due. When you avoid a bill entirely, it becomes a missed payment rather than late, although both will impact your credit score.

Do late payments affect your credit score?

Although CCR opens the door to credit providers directly reporting late payments, only those with an Australian Credit Licence qualify. If you make late payments to building societies, banks, credit unions, or credit card companies, these will all have an impact on your credit score. The specific impact will vary between credit agencies and individuals. Remember that while payment history forms an important component of your credit score, it’s not the only factor that lenders look at.

Phone, energy, and other utility bills aren’t reported under these guidelines. However, late payments worth over $150 that are 60 days overdue will be classed as defaults and make their way to your credit report. Default payments are even more damaging to your score, because they can stay on your file for up to five years.  

How long do late payments affect credit score?

Late and missed payments are reported after 14 days, but when are they removed from your credit history? How long do late payments affect credit score? With CCR regulations, late payments can stay on your reports for up to two years. Default payments will remain for longer, so it’s worth making a payment as soon as possible.

The frequency of late payments will also have a bearing on your credit score. According to anExperian white paper, missing one credit card payment will cause your score to decrease by 22% on average. Two missed payments will lead to a 26% decrease. When you reach the third late or missing payment within three months, it can cause a hefty 42% drop in your score.

Reducing late payment impact on credit score

A history of late and default payments will have a serious impact on your ability to access lines of credit in the future. Late payments lead lenders to believe that you have financial difficulties, making it riskier to offer more credit. This leads to higher interest rates and reducedloan offers.

While it may seem that CCR penalises borrowers more severely for late payments, the idea behind this initiative is that it will also reward borrowers for each on-time payment. These are reported to your credit file alongside late payments. A simple way to tip the scales and improve your score is by making all future payments on time. While a single late payment could cause a minor ding to your credit score, the best thing to do is continue to pay your bills consistently. Set up automatic recurring payments so you never miss a due date.

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