A late car payment may not seem like a big deal, especially if you end up paying it eventually. Many people assume that the worst that can happen is a small ding in their credit, if anything should happen at all. When they think about serious credit damage, a repossession is more likely to come to mind. However, it’s crucial to realize that late car payments can have long-lasting effects that occur almost instantaneously.
Credit Score 101
To get a clear picture of what a credit score is, it’s helpful to know that it’s a 35-30-15-10 formula. This means:
- 35% is based on late payments
- 30% is based on account balances
- 15% is based on history
- 10% is based on new credit amounts
It’s important to note that late payments total over one-third of your score. So the next time you think a late payment won’t affect you—think again.
When is Late, Late?
Most lenders consider your car payment late after 30 days. Does that mean you should push it each month? Absolutely not. You can still accrue penalties and fees within those 30 days, which will further hinder your budget. If you know you are going to be late, or some kind of emergency situation has occurred, then call your lender right away. Communication is the key, and chances are they will be able to assist you if it’s something you don’t do chronically.
If your car payment has become an issue, and you simply can’t afford it or are late all the time, consider trading your car in for something that is affordable, or look at ways to boost your income if possible.
Short-term effects
After a single late car payment, your credit score can take an immediate hit of up to 100 points. It’s a scary reality. Also, you’ll most likely get flagged. Auto lenders don’t tend to be a flexible bunch. If you haven’t contacted them, and you missed a payment, repossession quickly becomes a possibility.
Long-term effects
Just like in gambling, losing 100 is a lot easier than gaining 100. Earning those 100 points back may take years, and that late payment is on your credit report for 7 years. You also don’t want that payment to get to 60 or 90 days late. That has even farther-reaching implications. The worst is a repossession. It will make it challenging to get an auto loan for a good, long while, and make you a poor credit candidate in many situations, including buying or renting a home or apartment.
Your Options when in Distress about a Payment
If you find yourself in the position of no money when the car payment is due, don’t sit and fret, take action. Start with the call to the lender and see if there are any options. Next, look for side work or ways to earn extra income that month. It may mean selling that sweet pair of shoes you never wear. Other options are refinancing for a lower payment, finding a community program for emergency help or weighing the pros and cons of selling your car or trading it in for a more affordable ride.
If you don’t take action, it can pose serious consequences. Also, if you do end up having a late payment, take steps to ensure it doesn’t happen in the future. You can do this by:
- Making a budget and stick to it
- Continuing to make on-time payment till the end of the loan
- Consider signing up for autopay or reminder notices
- Keeping an eye on your credit report, and sign up for monitoring if it fits in your budget
Boosting your Credit after Taking a Hit
As painful as it can seem, knowing what a luxury is is essential. Clothes, cable, coffee—those are luxuries. Rent, mortgage, car payments, food are not. If you’re someone who has a lot of debt and are having a hard time managing it, it can be beneficial to put together a full financial plan. Research online how to do it, or head to a community program like Houston’s Financial Opportunity Centers. Prioritizing will be one of the best skills you can learn.
Some things you can do to boost your credit include:
- Don’t open more accounts
- Keep paying your balances on time
- Keep balances low
- Be patient
The next time you have the option to stash a little money away for future car payments or have a wild night out with friends at a five-star hotel, think about the short- and long-term ramifications if you can’t pay your bills. Paying for your car gives you the ability to work, hang out with friends, shop and maintain your responsibilities. A few late payments can take all of that away.
