The impact of late payments on your credit when money is tight



Q:




It seems like everyone we talk to is struggling to keep track of bills and expenses. My partner and I have three older teenagers between us and luckily they work and cover their own expenses. But the food, man, got expensive for us. We are at the point where we are doing our shopping, but for the first time in our lives, our bills are sometimes being paid late. We’re worried about what it might do to our credit, but we’re not looking to borrow any money right now. So we wonder if late payments will affect us anyway? ~Paul




A:


During these tough economic times, many Canadians have struggled to meet their various financial obligations. In fact, globally, as many as 40% of respondents in 28 countries expect disposable income to decline over the next year.

*

As groceries and fuel consume more of our income and the cost of living continues to rise in almost every direction, to take care of the essentials many people have started skipping or make partial payments for their obligations.


Although it may seem like the only thing to do, late or partial payments on your credit cards, loans, lines of credit, utility bills or mortgages will affect you in various ways. It’s important to make sure your expenses match your income, but in the meantime, here are some key things to keep in mind if you can’t keep up with all your debts and bills.



Late payments affect your credit score





Some people watch their credit score closely while others barely know what a credit score is. It’s not worth obsessing over your credit score, but whichever way you look at it, some awareness can be worth it. When it comes time to borrow more money, or when a lender wants to know how you’re doing with the money they’ve already lent you, your credit score matters a lot.



What is a credit score?



A credit score is a number between 300 and 900 and it gives potential lenders an indication of how likely you are to repay the money they lend you. When you make late payments, your score goes down because you don’t meet your obligations.


What is a credit score and how is it calculated?



A credit rating can affect current credit products





Your credit score is not only important when you want to borrow money, it also matters for the credit you already have. Lenders will check credit scores from time to time and if your number is lower than they would like to see, they might change some of the terms or conditions of any credit product you have with them. The two biggest changes you would see are a decrease in the amount of revolving credit you have or the interest rate at which you borrow could increase.


If you’re relying on your credit cards or line of credit to make ends meet and suddenly your limit is lower than it was before, you could find yourself in a tough spot. A decrease in available credit will also increase your credit utilization rate. This means you’ll be closer to the limits of what you can borrow, which will further lower your credit score.


How to stop relying on credit cards to make ends meet


Sometimes a lender increases your interest rate if your payments are not made as agreed. This can occur alone or in conjunction with a lowering of the limit. With many credit cards, for example, that could mean an increase in your APR (annual percentage rate) by five percent and higher minimum payments for at least the next 12 months. With a line of credit, the number of percentage points above the prime rate at which your payments are fixed could increase permanently.


Skipping a credit card payment could leave you stranded



How do late payments affect your mortgage?





Late payments can be a big problem. In addition to the impact they may have on your forms of revolving credit, they could also impact a mortgage renewal. Six to twelve months before your mortgage expires, your lender will see how you’ve made your payments. They will perform a soft credit check only on the credit products you have with them. If they find that your payment history is questionable, your mortgage renewal terms will be affected. They might even insist that you get a new mortgage from another lender.


Soft Credit Check vs. Hard: What’s the Difference?



Get help dealing with late payments





The longer you fall behind with your payments and bills, the harder it becomes to catch up and stay caught up. If you find yourself falling further and further behind, it’s time to act fast. Don’t wait for debt collectors to contact you. Take action immediately to resolve your situation.

Sketch a budget

,

track your household expenses

contact creditors to ask for lower interest rates or payment assistance, review all utility bills to see which ones can be reduced or eliminated, and temporarily suspend contributions to any long-term savings efforts.


How to reduce the costs of an emergency budget


If you feel overwhelmed and don’t know how to manage your budget, debts or payments,

contact a non-profit credit counseling agency

in your region. They will review your finances with you and provide information and advice. It’s not worth it

obsessed with your credit score

or making choices just to keep him strong. Your score will take care of itself if you manage your money to close your budget gap.



The Bottom Line on What to Do When Debt Payments Are Late and Overdue





The only way to really solve a budget deficit problem is to align your income with your expenses. This can mean reducing your expenses, generating more income, or a combination of the two. It won’t necessarily be easy and it won’t happen overnight. You will have some tough choices to make along the way. However, the sooner you are able to balance your budget, the sooner you will regain your peace of mind.



Related Reading:



Top Tips for Fixing a Bad Credit Score


Keep track of your money with an alternative method of budgeting


Credit Score Basics in Canada



Scott Hannah is president of the Credit Counseling Society, a non-profit organization. For more information on managing your money or debt, contact Scott by


E-mail


Check


nomoredebts.org


or call 1-888-527-8999.



Copyright Postmedia Network Inc., 2022

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