How you can rebuild your credit score even after late payments

Too busy to pay that credit card bill? Make sure you keep a monthly tracker of your bill date because missing out on a single credit card bill payment or loan installent,  impacts your credit score. 

What is a credit score

Missed as well as late payments get reflected in your credit report. This is something you wouldn’t want if you are planning to take a loan or a credit card in the near future. A credit Information Bureau of India Limited( CIBIL) score is a three-digit number which reflects an individual’s credit worthiness and is the prime judgment factor for banks and other money-lending organizations when assessing a loan application. 

The average credit score of Indians stood at 715 in financial year 2021-22, as per a report by OneScore, a credit score monitoring platform. Lenders generally prefer customers with a score of 750 and above.

CIBIL score helps banks and NBFCs (Non-banking Financial Companies) assess the applicant’s loan repayment capacity. Missing to pay your outstanding loan instalments or credit card bills payments also minimises your chances of getting a credit card loan application approval.

What happens to your credit score if you make a late payment?

 Data provided by Delhi-based fintech IndiaLends has provided details of late payment impact on your credit score-
 

If you’re less than 30 days late:

You need to give late payment fee and perhaps a higher APR, but it does not leave any effect on your credit score if you pay before the 30 days.

30 days late:

This record will damage your credit score if it is too often. A single 30-day late payment will not cause lasting damage to your score. A payment that's at least 30 days past due could drop your score by 100 points.

60 days late:

One late payment does not cause long-term damage to your credit score. However, if it is often then it would hurt your credit score.

90 days late:

This record will hurt your credit score for up to seven years. If you have already missed the payment once, you’re considered more likely to do it again. As a result, your credit scores will drop.

120+days late:

At this point, your debt is usually “charged off” or sold to a third-party collection agency. Both occurrences are reported on your credit report and hence, your credit score will reduce further.

Difference between minor and major defaults

According to Paisaabazaar,  customers must understand the difference between minor and major defaults, so as to gain better understanding about missed payments and its effect on an individual’s credit score.

Minor Defaults: The payments missed or delayed for a timeframe less than 90 days is regarded as minor defaults. In this case, your CIBIL score would take a permanent thrashing but is affected only on a temporary basis.

Major Defaults: There are times when a person fails to complete his/her payments beyond 90 days. In this situation, the individual’s account is tagged under the NPA (non-performing assets) group. This is considered as a major default and keeps the lenders at a distance due to poor financial or credit repayment history, explained Paisabazaar.

But,don't fall prey to this misconception that one late payment can destroy your credit score completely. It is not impossible for you to rebuild it again. 

While late payments can have a detrimental effect on your credit score, making it challenging to secure loans, obtain favourable interest rates, or even rent an apartment. One late payment doesn’t have to define your creditworthiness forever. By taking proactive steps, you can rebuild your credit score and regain financial stability. 

Bankbazaar offers  some tips to help you improve your credit score after a late payment:

Assess the Damage 

Start by reviewing your credit report and identifying the late payment entry. Understand the impact it has had on your credit score and how it may affect your overall creditworthiness. This will provide a clear starting point for your credit repair journey.

Pay Your Bills on Time

Make it a top priority to pay all your bills on time. Consistently meeting payment deadlines demonstrates responsible financial behaviour and helps rebuild your creditworthiness over time. Set up automatic payments or reminders to ensure you never miss another due date.

Set Up Payment Reminders 

Set up payment reminders through your bank’s online banking platform, smartphone apps, or calendar alerts. These reminders will help you stay on track and avoid future late payments.

Build a credit history

Your credit score heavily relies on your credit history. Focus on building a positive credit track record by responsibly managing your existing credit accounts. Pay all debts on time, keep credit utilisation low (aim for below 30% of your available credit), and refrain from opening unnecessary new accounts.

 "We advise customers to avoid spending more than 30 per cent of their spending limit. A high credit utilisation ratio (CUR) moderately hurts credit score. CUR is the per centage of your available spending limit in a month," said Adhil Shetty, CEO, Bankbazaar.com.

Set up an auto debit facility

f you have a salary account with the issuing bank or any other bank, you may leave a standing instruction with your credit card or loan provider to debit the minimum or outstanding amount by a particular date. 

"Borrowers must use an auto-debit facility to ensure timely repayments. They should also periodically check their credit score for any inaccurate entries that may negatively impact their credit score," said  Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.

Check Your credit report every month

You must check your credit report monthly. Regularly monitor your credit report to track your progress and ensure the accuracy of the information being reported. Review the report for any errors or discrepancies and report them promptly.

 “Any person with a running loan or active credit card should check their credit score once every month. A credit score is a three-digit rating given to borrowers for their credit behaviour. The rating ranges between 300 and 900. The higher you score, the better, 900 being the elusive, perfect score," said Shetty.

Is there a way I can avoid the impact of late payment on my credit score? 

If a borrower has unintentionally missed a repayment, she can repay it within the next 3 days to avoid any impact on the credit score.

"If more than 3 days have passed since the repayment was missed, the borrower can request the lender institution to consider the good credit history to make goodwill adjustments. It is up to the lender to agree or disagree with this request, given the consideration amount and the nature of the transaction. If the lender does not agree to goodwill adjustments, the borrower should try to pay full dues to minimize the impact on the credit report," said Kulkarni.