Making a payment after the due date makes it delinquent. Generally, people miss or make late payments for many reasons, ranging from an honest mistake to financial hardship. However, any late or missed payment for a fiscal obligation, such as a contract-based service, utility bills, subscription fees, invoices, etc., can trigger penalties, additional charges, service suspension, and more, depending on the terms of the contract.
Fortunately, lenders typically provide grace periods to allow for missed payments to be resolved. There are also proactive steps you can take to minimize the likelihood of delinquent payments, helping you maintain a positive relationship with your lender and safeguard your credit score.
How Does Delinquent Payment Work?
Failing to make a required payment on a financial obligation by the due date causes the account to enter delinquency. Payments made after the due date are considered delinquent.
There are many stages of delinquency, and the consequences vary by stage, too. The lender’s policies and type of debt can also determine the consequences.
- Less Than 30 Days Past Due
Typically, the lender will get in touch right away about payment and can charge a late fee.
- 30-60 Days Past Due
The lender might reach out again and charge an additional late fee. You are most likely to be reported to the main credit bureaus. Likewise, if you have secured debt backed by collateral, such as a car or house, the lender can initiate a repossession to recover their loss. This would depend on the loan agreement.
- 60-90 Days Past Due
Additional fees and penalties will be charged, and the lender will communicate with you regarding the payment. Sometimes, they may also offer different payment plan options. At the same time, they will continue reporting the delinquency to the credit bureaus.
- 90-120 Days Past Due
After 90-120 days past due, your account will usually be declared in default. This means you have failed to meet your obligations, which can lead to further legal and financial consequences, such as collections or lawsuits.
- 120+ Days Past Due
After more than 120 days, the lender will close your account and write off the debt as a loss, known as a charge-off. This greatly lowers your credit score and stays on your report for years. Even after a charge-off, you are still required to pay the debt. The lender can send your account to a collection agency, which can take legal action against you.
Why Does A Delinquent Payment Happen?
Delinquent payment can happen for several reasons, as mentioned below:
Expired Credit Card
Credit cards expire every 2-5 years to protect from fraud and to replace worn-out cards. So if you use your credit cards for automatic payments, like a subscription, ensure you update your new card. Otherwise, the automatic payments will not go through, creating a delinquency.
Closed Credit Cards
If the credit card account is closed, the borrower should still settle the balance. Sometimes, the borrower may not be aware of an outstanding balance on a closed account, which can lead to delinquency. Automatic payments will also fail, disrupting payments and leading to a delinquent payment.
Not Having Enough Funds
This happens when the bank account does not have a sufficient balance to cover a transaction. So if the bank account you use to make automatic payments on your credit card doesn’t have enough funds, it will lead to a payment delinquency.
Financial Difficulties
When you are facing a financial hardship, such as a medical emergency or job loss, meeting your financial obligations can be overwhelming. Sometimes, some debts, like credit cards, permit you to pay a portion of your outstanding monthly balance and free up some funds to attend to your emergency expenses. After this, you will need to make the remaining balance payment.
Some lenders also offer financial relief if you get in touch with them, such as directing you towards programs that reduce or pause payments temporarily.
Administrative Errors
Errors such as scheduling a payment on the wrong date or failing to transfer the correct amount can result in delinquency. Automatic and manual payments will not go through if funds are unavailable, which can lead to delinquency.
How Can A Delinquent Account Affect Credit Score?
Payment history is the most influential part of common FICO credit scores, making up 35% of your score. Delinquent payments appear on your credit history, substantially lowering your credit score. Multiple delinquent payments can cause even more significant credit damage, affecting loan approvals and interest rates.
Moreover, a delinquency remains on your credit report for 7 years from the date the payment was first marked delinquent. Luckily, some credit card companies do not report delinquent accounts to credit bureaus until the account is at least 30 days late, giving you time to catch up on payments.
How Can You Avoid Delinquent Accounts?
- Set up a budget that prioritizes debt payments and essential bills like food and utilities. This could mean spending less on non-essentials, but at least you make your full payments on time and avoid the risk of an account becoming delinquent.
- An emergency fund is a savings account that can help cover unexpected expenses. Using your emergency fund can help prevent delinquency.
- Consolidate debt by taking out one loan to pay off several debts. Alternatively, you can also refinance your debt by paying off an outstanding loan or credit card with a lower-rate loan.
Is There Any Way To Recover From A Delinquent Payment?
If you respond quickly, you can get back on track after a delinquent payment. First, pay the overdue amount as soon as possible. If you can’t pay it all at once, paying part is better than paying nothing. You can also contact your lender, credit union, bank, or credit card issuer to discuss your options. Some lenders may waive the late fee for your first missed payment or may discuss alternative payment plans if you are struggling to catch up.
Managing delinquency can be challenging, and it is not uncommon to feel overwhelmed. If you are having difficulty managing your debt, consider seeking assistance. Working with a nonprofit credit counselor may help you develop a debt management plan that allows you to pay off your obligations.
