Money Management

Paying even one bill late could damage your credit score quite a bit. Read on to learn more. 

Your credit score is an indicator of how risky a borrower you are. If you have a strong credit score, a credit card company may be more likely to approve an application for a new card. And a personal loan or auto loan lender may be more likely to approve your loan application and give you a more favorable rate.

On the other hand, a lower credit score tells lenders and credit card issuers that you don’t necessarily have the most solid track record of paying bills and managing your credit well. As such, you may be denied a loan or credit card if your credit score is poor.

Now, there are different factors that go into calculating a credit score. These include the amount of revolving credit you’re using at once, the length of your credit history, the types of credit accounts you have, and the number of new loans or credit cards you’ve recently applied for.

But the factor that carries more weight than any other when calculating credit scores is your payment history, which speaks to how timely you are with your bills. And that’s why paying a bill late could cause major damage to your credit score — even if it only happens once.

It pays to be timely with bills

If you’re a few days late paying a credit card bill or sending in a mortgage payment, it generally won’t do anything to your credit score (though you might face a late penalty or fee from the entity you owe money to). In fact, Experian says late payments don’t even get reported to the credit bureaus until you’re 30 days past due.

But from there, a single late payment has the potential to drag your credit score downward. And unfortunately, the damage might be more severe if you have strong credit to begin with.

You might think that if your credit score is high, a single late payment wouldn’t do much damage since it’s an out-of-the-ordinary event for you. But actually, the opposite is true. Experian says that if you have poor credit already and another late payment is thrown into the mix, it likely won’t have as severe an effect as a late payment would for someone with excellent credit. Go figure.

Meanwhile, the further behind you fall on payments, the more credit score damage you might face. Being 90 days late on a payment, for example, is apt to lower your credit score more than a payment that’s just 30 days late.

You should also know that over time, the impact of late payments on your credit score diminishes. And after seven years, late payments are removed from your credit report completely. Once that happens, they won’t impact your credit score at all.

But still, it’s important to avoid late payments as best as you can. Even one late payment could cause a lot of damage.

What to do if you’re late with a payment

If you’re a few days late paying a bill and you make your payment within 30 days of its due date, generally, nothing will happen from a credit score perspective. But let’s say you realize after 35 days that you didn’t make a payment. If so, contact the entity you owe money to, arrange to make the payment at once, and ask if it’s possible to not report your lateness to the credit bureaus.

If you’ve been an account holder for many years and it’s your first offense, you may be let off the hook — especially if you’re right past the 30-day mark. Otherwise, do your best to make your payment as soon as you can. You’re better off being just 45 days late with a payment than 65 days late.

At the same time, set calendar reminders for when your bills are due so you don’t risk being late due to forgetfulness. Even better, set up your bills to autopay when that option exists. Many payees will allow you to set up automatic recurring payments, and it’s a good option for bills that are fixed (such as if you have the same mortgage payment due every month).

Finally, aim to follow a budget and keep track of your spending. That way, you’ll be less at risk of being late with a payment due to a lack of funds.

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A car payment that is too big can put major stress on your budget. But how big should your payment be? Find out here. 

Buying a car is an expensive proposition, which is why many Americans borrow for one. Research from Edmunds showed that the average monthly car payment for a new vehicle was $717 in the fourth quarter of 2022, while the average monthly payment for a used vehicle was $563.

The big question is, are these payments reasonable or are people taking out auto loans that are too large? Before borrowing for a car, it’s important to have an answer to this question and know how large your monthly car payment actually should be.

The ideal size of your monthly car payment

In an ideal world, you would not have a monthly car payment. That’s because cars are depreciating assets, so they go down in value over time. If you’re paying interest on a vehicle because you borrowed for it, you are spending extra money each month on a vehicle that is worth a little less than you paid for it each day.

For most people, though, paying for a car entirely out of savings just isn’t feasible. A car isn’t optional for those who need one to get to work or school or to fulfill family obligations, and if you need a car and don’t have tens of thousands of dollars sitting around, then you’re going to have to borrow for it.

If you have to borrow, you should aim to keep the costs of your car payment to no more than 10% of your income, although some experts say you can go up to 15%. Capping the costs at 10% can help you ensure your vehicle loan doesn’t compromise your other financial goals.

You can also determine exactly how much you can afford to spend by making a detailed budget and looking at your other expenses, including the amount you need to save for retirement, big purchases, and other future objectives. If you have a budget that allocates every dollar, you can see how big your car payment can be without causing you to develop a shortfall and not be able to do other things you want.

For most people, though, following this 10% rule is an easier approach, and it can serve as a guide to help you ensure you don’t devastate your personal finances with your vehicle payment.

How can you keep your car payment to 10% of your income or less?

Although you should keep your car payment to below 10% of income, not everyone is doing that. In fact, the Bureau of Labor Statistics reports the annual mean wage was $61,900 as of May 2022. That means someone who made the average annual income and who paid the average car loan payment for a new vehicle would be spending close to 15% of monthly income on their vehicle.

The good news, though, is that there are steps you can take to ensure your car payment stays within your budget. To do that:

Buy the cheapest reliable used vehicle you can. You can always save up for a fancier car later if you want better wheels.Drive your car for as long as possible. Once your car loan is paid off, keep making the “payments” into a savings account. Use that saved money to buy your next car in cash eventually, or at least put a large down payment on it.Maintain your vehicle. If you take good care of your car, it will last longer so you can drive it longer and you can avoid costly repairs.Shop around for a car loan. Don’t assume dealer financing is always the way to go.

One thing you don’t want to do, though, is choose a car loan with a longer repayment term. While this would make your monthly payment cheaper, it makes your total borrowing costs more expensive and it leaves you in debt longer.

By following these tips, hopefully you can keep your car loan payment to a reasonable level so you’ll have plenty of money left over for other things that help you build a secure future.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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