Paying a payment after its due date causes that payment to become delinquent. People may miss a payment or make a late payment for a range of reasons, sometimes by accident or due to financial hardship. Timeliness of payments, whether delinquent or on-time, make up the biggest part of FICO credit scores. Fortunately, lenders may offer grace periods so you can catch up on payments. Plus, several strategies can reduce the chance of delinquent payments so you can stay in good standing with your lenders and protect your credit score.
Here’s what we’re going to cover:
- How do delinquent payments work?
- Causes of delinquent payments
- Delinquent vs. default
- How can a delinquent account affect your credit score?
- Ways to avoid delinquent accounts
- Oportun: Affordable lending options designed with you in mind
Key takeaways
- Delinquency occurs when you don’t make a payment on a financial obligation, like a loan or bill, by the due date. A delinquent payment is a payment that occurs after the due date.
- Delinquencies can negatively impact your credit score, but lenders may provide grace periods, so that making a payment a short while after the due date does not result in a delinquency.
- Several strategies can help you make all your payments on time and avoid delinquency.
How do delinquent payments work?
When someone fails to make a required payment on a financial obligation, such as a debt or a utility bill, by the required due date the account enters delinquency. Any payment made after the required due date is a delinquent payment. This can result in late fees, financial penalties, and similar measures. However, some financial companies offer grace periods. If you pay after the due date but before the end of the grace period, you’ll avoid delinquency.
For example, imagine you have a personal loan payment due on the 10th of every month, but your loan has a 15-day grace period. Paying on the 15th won’t result in delinquency. Another example is rent. Rent is often due on the first day of each month, but some landlords may offer a few extra days before considering a payment delinquent.
Causes of delinquent payments
Delinquent payments can happen for several reasons:
Expired credit card
Credit cards expire every two to five years to protect against fraud and replace worn-down cards. If you use your credit card to make automatic payments, such as for a subscription, you must update your new card or else your automatic payments will not go through. This can create a delinquency. You can review your card’s automatic payments and update your information when you get a new card to help avoid this.
Closed credit cards
If a credit card account is closed, the borrower must still pay the balance. The borrower might be unaware they can still have an outstanding balance on a closed account. This can lead to delinquency since the borrower may not remember to make their payment. Furthermore, automatic payments that were set up to be paid by the closed credit card will fail. This disrupts the cardholder’s payments, potentially leading to a delinquent payment. Make sure to read the communications from your issuing credit card, even if the account has been closed, to confirm that balances are paid off.
Insufficient funds
Insufficient funds occur when a bank account doesn’t have a large enough balance to cover a transaction. If the bank account that you use to make automatic payments on your credit card has insufficient funds, the payment may not go through, leading to a payment delinquency on your credit card. In some cases, payments may go through, but the bank will overdraw your account. This may lead to overdraft fees but could help you avoid the impacts of a delinquent payment.
Financial hardship
Financial hardships, such as a job loss or medical emergency, may make it challenging to cover all your financial obligations as you prioritize your emergency costs. Fortunately, some debts, such as credit cards, may allow you to pay just a portion of your outstanding monthly balance, so you can free up funds to take care of emergency-related expenses. After the emergency, you could resume making larger payments on the remaining balance. Furthermore, lenders may offer financial relief if you contact them, such as programs that pause or reduce payments temporarily.
Administrative oversights
Administrative oversights can lead to delinquencies. For example, scheduling a payment on the wrong date may lead to an accidental late payment, resulting in delinquency. Another example would be not transferring funds to the correct account if that account is used to make payments. Automatic and manual payments may not work since funds aren’t available, leading to delinquency.
Delinquent vs. default
A delinquency describes a payment or account that is late. A default happens when you fail to resolve a delinquency after multiple payment due dates and breach the terms of the underlying agreement. People often use the term “default” to describe a more severe status that illustrates a longer time period of a missed payment. Here are some differences between them:
- Timeframe: Delinquency occurs when you miss a payment and sometimes after a grace period, whereas default can happen if you miss the payment and continue to not make the payment or subsequent payments over a set period of time.
- Credit impact: Both will impact your credit score. A default may impact your credit score more than a delinquency.
- Financial consequences: Delinquencies often lead to fees and, for credit cards, penalty annual percentage rates (APRs) (temporarily higher APRs). Some may lead to collections calls as well. Defaults may lead to steeper penalties and legal actions.
- Recovery: If you have a delinquent payment, you may be able to negotiate terms such as your interest rate or a payment plan. Defaults may involve more intensive negotiations.
How can a delinquent account affect your credit score?
Payment history is the biggest factor affecting the common FICO credit scores, making up 35% of the score. Delinquent payments are recorded under your payment history, so a delinquency could lower your credit score, and multiple delinquencies have an even bigger negative impact. Each delinquency stays on your credit report for seven years from the date the payment was considered delinquent. However, many credit card companies don’t report delinquent accounts to credit bureaus until they are delinquent for 30 days. This can give you time to catch up on payments, if you act very quickly.
Ways to avoid delinquent accounts
Several strategies can help you avoid delinquent accounts, including:
Create more room in your budget
Create a budget that prioritizes debts and other required bills like food and electricity. You may have less to spend on non-essentials, but you’ll find it easier to make your full payments on time, reducing the chance of an account becoming delinquent. Even if an account becomes delinquent, having the money to pay it helps you take care of it as fast as possible to minimize negative consequences.
Use your emergency fund
An emergency fund is a savings account to cover unexpected expenses. A solid guideline is to keep three to six months of expenses stored. This account can help you continue to make payments and stay delinquency-free. You can also use a savings app like Oportun’s Set & Save to build your rainy-day fund, or savings specifically with the goal of paying your bills off.
Consolidate and refinance your debt
Consolidating debt involves taking out one loan to pay off multiple debts. This leaves you with fewer debts to track, reducing the chance you overlook a payment. Refinancing, on the other hand, involves paying off an outstanding loan or credit card with a lower-rate loan. This can reduce your monthly payment and interest rate, saving you money and making it easier to make your full monthly payments.
Consider debt and credit counseling
Debt and credit counselors offer structured guidance for managing and paying down your debts. They review your income, expenses, and debts to help you make and stick to a plan. Counselors can also help negotiate with creditors to lower your interest rates, qualify for financial hardship programs, or potentially get some of your debt forgiven.
Oportun: Affordable lending options designed with you in mind
Now that you understand how delinquent payments work, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about:
- Personal loans
- Secured personal loans
- Set & Save
- And more!
Sources:
Investopedia. Delinquent: Definition, Example, and Statistics on Delinquencies
Forbes. Credit Card Expiration Dates: What You Need To Know
Investopedia. Delinquency vs. Default: What’s the Difference?
FICO. What is Payment History?
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