Missing Payments and Loan Deferrals

Missing a payment could knock off as much as 100 points from your credit score. This is because payment history has the biggest influence on the calculation of your credit score. While it is not always possible to make payments on time, job loss, unexpected expenses, or other financial struggles can make paying on time difficult. Making sure you are aware of the impact a missed payment will have on your credit score and what you can do to offset the impact should be important to all consumers.

What Happens When You Can’t Make a Loan Payment?

Unfortunately, when a borrower misses a loan payment several repercussions can occur. First, you may be subject to a late payment fee from your lender. Whether these fees are applicable and the amount depends on the lender and your agreement with them. You could also face increased interest rates which is also dependent on the lender and your lending agreement.

Another consequence of missing a loan payment is the negative effect to your credit score.

How Do Missed Payments Affect Your Credit Score?

Payment history is worth 35%, which is the largest contributing factor to the calculation of your credit score. Although, there are some details to be aware of when it comes to missing payments and your credit score.

To start, a late payment cannot be reported to the credit bureau until it is at least 30 days late. If you expect you’ll miss a payment, this time period can buy you a little time until you come up with the money or create a plan of action. If you can pay within the 30 day period, you will likely face a late payment fee or higher interest rate, but your credit score won’t take a hit. If you usually pay on time, you can reach out to your lender and ask for the late payment or interest rate increase to be waived.

Once the 30-day mark passes, lenders report to the credit bureau in 30-day increments. The longer you do not make loan payments, the worse the impact will be on your credit score. Usually at the 120-day overdue mark, lenders will send the account into collections which will have an even worse impact on your credit score. Ultimately, it’s best if you can deal with the issue as soon as possible to avoid further impact to your credit score.

A late payment stays on your credit report for seven years after the account was reported late initially. The good news is the impact of a late payment gradually fades the longer it remains on your credit report.

It’s important to note that sometimes late payments are marked on your credit report in error. If this happens to you, reach out to the lender and ask them to make a correction on their end. You can also file a dispute with the credit bureau to have the mistake corrected. It’s important to keep an eye on this issue because a false missed payment can impact your credit score just as much as a real missed payment can.

Can You Defer Your Payment to Avoid Late Payments?

Yes, there are options available to defer a payment. While you’ll be able to pay your debts at a future date, it’s important to note that other penalties can still occur, such as accrued interest. There are also additional payment deferral options available at the moment due to the COVID-19 pandemic.

What Does it Mean to Defer Your Loan Payments?

A deferred loan payment means that the due date is pushed further into the future. You still owe the full amount that’s due to your lender, it will simply be paid at a later date. However, interest will still accrue on the principal amount owed which means higher costs of borrowing.

How Does a Payment Deferral Affect Your Credit Score

Because you agreed to pay your debts at a later date with your lender, payment deferrals won’t impact your credit score at all. Instead, there will simply be no information reported to the bureaus for the period in which your payment was deferred.

How Do You Get a Payment Deferral?

The first step to obtaining a payment deferral is to reach out to your lender. Often, you can either book an appointment or schedule a call to discuss payment deferral options. You can also read through your lending agreement in search of grace periods or skip payment allowances. Some lending agreements have policies surrounding these issues because everyone faces financial hardship at some point.

Due to the COVID-19 pandemic, many financial institutions and lenders in Canada are offering payment deferrals to their clients. This includes payment deferrals for mortgages, credit cards, personal loans, car loans, and other financial products. Keep in mind that you’re still required to pay the full amount that’s owed in the future and interest continues to accrue on deferred payments. Reach out to your financial institutions and lenders to determine what options are available to you.

Other Options to Avoid Missing Payments

Missing a payment is a stressful process that can have a lasting impact on your finances. There are things you can do to ensure that you don’t miss a payment in the future, as follows:

  • Set up payment reminders
  • Set up automatic payments
  • Borrow from friends and family
  • Refinance
  • Seek credit counselling from a professional
  • Build and maintain an emergency fund
  • Create a budget

What Can I Do If I Already Missed a Payment?

If you’ve already missed a payment, there’s not much you can do to reverse it, unfortunately. All you can do is focus on the future by ensuring that you’re using good financial habits to avoid missing payments. Good financial habits include:

  • Avoid using more than 30% of your available credit limit
  • Avoid applying for new credit unless you absolutely need it
  • Create a budget to ensure that you pay your bills on time and in full
  • Build and maintain an emergency fund

Bottom Line

If you feel as though you will not be able to make a payment on time, it’s in your best interest to get in touch with your lender or creditor before you miss the payment. Lenders and creditors may be able to help you out by offering a payment plan or even a payment deferral. Being honest and open is your best defence against falling behind on your debt obligations.


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