So you’ve paid your Credit Card bill late. Any idea how it’s going to affect you in the long run? Well, that’s what we’re about to find out!
Deferred payments against Credit Card bills and loan amounts are explicitly discouraged, and while recovering the amount from you is surely a concern for lenders, another major area of worry is your own financial report card – yes, your late payment can really hit you where it hurts… your Credit Score!
Your Credit Score mirrors your payment habits
Well, a reasonably good Credit Score gives lenders a sense of assurance that you’re a reliable individual who will repay your debt as per the agreed terms. To put it simply, you’re considered creditworthy! Today, Credit Score has become one of the most important factors for banks to approve or reject your credit application.
What’s more? The interest rates offered to you share an inverse relationship with your Credit Score, i.e. – the better your score, the lower the rate of interest offered to you, and vice versa; you get the drift! Your loan amount eligibility, however, enjoys a direct relationship with your Credit Score, for obvious reasons.
How bad does a deferred payment sting?
Recent findings show a 100-point fall in Credit Score (ouch!) with every payment made later than 30 days from the actual due date. The extent to which your Credit Score is going to be affected also depends on the type of product you’re dealing with. In case of Credit Cards, a slightly late payment may not hurt your score too much, but if it’s a loan EMI you’re dealing with, you’ll not only bring your Credit Score down but also diminish your chance of approval for any loan within the next two years!
It’s not all bad news… you’re still better than a serial defaulter
Just because you’ve made one late payment, you don’t have to picture dark clouds lining up above you; straightening up your finances and diligently making prompt future payments will eventually compensate for the damage caused by the one late payment you made. Besides, even though you’ve been tardy, you’ve still MADE your payment at the end of the day.
Defaulters, on the other hand, end up digging their own financial grave by simply ignoring payment dates and prompts – you don’t want to know what awaits them on the other side!
Think of your Credit Score as your baby
Not kidding, because you need to nourish it, ensure it grows and is protected from getting a knock on the head at all times! In fact, this analogy holds good even in the way your Credit Score gets impacted by a late payment.
Let’s take an example to understand this better. There are 2 kids, namely, A and B. A is a well-behaved, responsible child, and B on the other hand is a rule-bender. Now imagine both these kids make the same degree of mistake; who do you think is going to be more affected by it? The answer is A, the good kid.
Similarly, a good Credit Score, unfortunately, takes a bigger whack from a late payment than an average score. Besides, in most cases, the one who’s maintained the former is bound to care more about it, right?
How do banks find out about my Credit Score?
To understand this, let’s assume you’re planning to go in for a loan. You apply accordingly. Now what? Well, the first thing banks do after receiving your application is a proper background check with their best buddies – credit information companies. Once they scan your records as per the credit company, banks will not only know if you’ve made late payments in the past but will also learn how many times you’ve deferred your payments. If they happen to find anything undesirable in your records, your application will automatically be rejected!
How badly are interest rates affected by a bad Credit Score?
Awaken not the beast that is the interest rate! To better paint the picture, let’s continue with the above example. Let’s say a handful of lenders are okay with offering you a loan…(wait for it)…but at a significantly high-interest rate! (Aw, snap!)
How high, you ask? Well, if the product you’re applying for is a Home Loan, which is typically taken over, say, a 2-decade tenure, then don’t be surprised if your total interest amount eats up the actual principal amount for breakfast….no kidding!
Don’t fret…this is just a heads-up!
Don’t let the intense repercussions of bad credit management throw you off… we don’t intend to shock you! We’re just well-wishers who want to help you steer clear of all the unpleasantness that can come from making late payments by stressing on the importance of managing your finances well. In fact, sticking to agreed EMI and Credit Card bill payment terms not only helps you maintain a healthy Credit Score but also keeps you safe from any penalty fees that are attracted by late payments.
Credit can be your friend
All said and done, there’s no denying that credit is a powerful tool, but in Peter Parker’s uncle’s famous words, “with great power comes great responsibility!” If you make informed and well-planned decisions about credit products, you’ll surely be able to leverage the many benefits they have in store for you.
In this past-faced world we live in, a Credit Score works as a quick and highly reliable source for banks to judge your credit management record, and thus allows them to process your credit application at a fast pace through convenient and trusted portals.
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