What is the Impact of Late Payments on Your CIBIL Score?

In today's world, individuals can avail of loans and credit cards to fulfil their financial goals. A key factor in accessing credit is the CIBIL Score, which reflects a person's creditworthiness through a three-digit number assigned by CIBIL. Banks and financial institutions typically require an ideal credit score to extend loans at lucrative terms. Your credit score is based on past borrowing and repayment habits.  

What is a Late Payment? 

A payment that is not made by the due date agreed upon by the borrower and the lender, is considered late. Late payments can lower a borrower's credit score and make it challenging for them to get loans in the future. To avoid damaging your credit score, it's important to check your CIBIL score and complete all your transactions on time. 

How Does Late Payment Affect CIBIL Score? 

Yes, but before getting into what affects a CIBIL score, let us discuss what a CIBIL score is. A CIBIL score is a three-digit numerical summary of your credit history, rating, and report that varies from 300 to 900. 

Late payments can have several detrimental effects on a borrower's credit score and future ability to get credit. Following are some of the possible effects of late payments: 

• Negative effects on credit scores: When assessing your loan application, lenders may specifically look for late payments recorded in your credit report. Late payments can decrease a borrower's credit score. 
• Difficulty in getting credit: Having a history of late payments can make it challenging for a borrower to qualify for a loan or credit card. Even if the borrower is granted a loan or a credit card, they may have to pay a higher interest.  
• Increased default risk: Late payments generally indicate financial instability and may be seen as a risk by the lenders. Consequently, a borrower may find it challenging to get credit in the future. 
• Negative effect on the credit report: Late payments are reported to credit bureaus and will show up on the credit report of the borrower. This may affect the borrower's capacity to avail of loans at favourable interest rates.  
• Difficulty in recovering a low CIBIL score: After getting a late payment remark, borrowers may experience difficulties in improving their credit score. In such circumstances, it becomes important for them to practice prudent credit behaviour. 

Impact of Late Payments on Credit Score Based on the Duration of Delay 

Late payments can lower your credit score, with the impact depending on how long the payment remains overdue. Here is how different delays may affect your score: 

• 30 Days Late: A single late payment of 30 days can reduce your credit score by 50–80 points, depending on your overall credit profile. If paid immediately, the impact is relatively short-term. 
• 60 Days Late: If a payment is overdue by 60 days, the score drop can range between 50–100 points.  
• 90 Days Late: A 90-day delay can lead to a 100–150 point drop in your score. At this stage, the late payment is reported as a serious delinquency and remains on your credit report for up to seven years. 
• 120+ Days Late: Payments delayed beyond 120 days may lead to a 150+ point reduction, with the account potentially being classified as a default or sent to collections. This can make future credit approvals more challenging. 

What Steps Should You Take to Avoid Late Payments? 

Timely payments are important for maintaining a good credit score and financial stability. Here are some effective steps to ensure you never miss a due date: 

• Set Up Automatic Payments: Enabling auto-debit for your loan EMIs and credit card bills ensures payments are made on time, reducing the risk of missing due dates. 
• Use Payment Reminders: Set up alerts via SMS, email, or mobile apps to remind you of upcoming payments.  
• Prioritise Debt Repayments: Plan your expenses wisely, ensuring essential payments like loan EMIs and credit card bills are covered before discretionary spending. 

How to Rebuild Your Credit Score After a Late Payment?

The good news is that you can work to improve your credit score over time if a late payment has reduced it. Your credit report will show late payments for a few years, but your score may improve if you build a better repayment history. 

Here’s what you can do to rebuild your score:  

Clear Outstanding Dues 

Start by making the payment as soon as possible if it’s still outstanding. Settling the dues quickly can help prevent further decrease in the score.  

Set Up Payment Reminders or Auto-Debit 

It’s helpful to set up payment reminders or automate your EMIs and card bills so you never miss a due date again. 

Monitor Your Credit Report Regularly 

Regularly review your credit report to identify any errors and continue making all future payments on time. Over months and years of consistent repayment behaviour, your credit score can gradually recover. 

Difference Between Late Payment and Missed Payment

A missed payment and a late payment both affect your credit score, but in different ways. A late payment is when you pay after the due date, but before it is overdue. You may get a short grace period to make the payment. However, when the payment is 30 days or more past due, it becomes a missed payment, and this is typically reported to credit bureaus as a delinquency. A missed payment — one that remains unpaid after 30 days from the due date — is what gets recorded on your credit report and can negatively impact your credit score.

How Long Does a Late Payment Stay on Your Credit Report?

Once a payment is reported as late to a credit bureau, it remains on your credit report for up to seven years from the date of the first delinquency. During this period, the late payment record is visible to lenders and can influence credit decisions, although its impact lessens over time as you continue to make timely payments.

Minor and Major Payment Defaults 

Payment defaults are divided into two categories: minor and major.   

Minor Default: When a borrower misses or delays payment for less than 90 days, this is considered a minor payment default. Banks and lenders consider such defaults to be minor because they believe they will be resolved quickly. However, the CIBIL score is temporarily impacted in this case.  

Major Default: When the borrower pays the credit amount but does so after 90 days, this is considered a major payment default. As a result, the CIBIL score suffers more. Also, major payment defaults along with low CIBIL scores hinder future loan or credit card approval.  

The exact impact however depends on factors such as the length of the delinquency, the amount of the missed payment, and how recently the payment was missed. The frequency, severity and recency of missed payments can affect your credit score in different ways.  

Impact of a Missed Payment on CIBIL Score 

Here's how a missed payment can affect you: 

Decrease in credit score: 

Missed payments can lead to a drop in your credit score. Payment history accounts for a significant portion of your credit score, thus, a missed payment can have a significant impact on your creditworthiness.  

Late payment fees and interest charges: 

If you fail to make a payment on time, you may be charged late payment fees and interest. These fees and charges add up to the outstanding loan amount which increases the overall cost of borrowing. 

Difficulty in obtaining credit: 

Missed payments can make future credit applications more difficult, as lenders may be less willing to extend credit to you. 

Higher Interest Rates: 

If you are approved for credit despite having missed payments on your credit report, you may get offered higher interest rates, making borrowing more expensive. 

Negative impact on credit report: 

Missed payments can stay on your credit report for up to 7 years, which can have a negative impact on your creditworthiness during that time.  

What is 'Day Past Due' (DPD)?

Day Past Due (DPD) indicates how many days you've missed making a payment on your loan or credit card. If you have previously made on-time payments, your DPD will be listed as '0'. If you are 30 days late with your payment, your report will reflect '30' against the preceding month.  

There may be instances in the Day Past Due section when 'XXX' is stated. It signifies that the lender has not submitted the bank with payment history information. If you notice it on your credit report, you should not be concerned as it does not affect your future possibilities of getting a loan or credit card approval. 

Tips to Maintain a Good Credit History 

You can take measures to prevent late payments and maintain a good credit history. You can avoid late payments by following these instructions:  

• Set up automatic payments: Several lenders give you the option of setting up automated payments, ensuring timely payments. Essentially, this means that you leave standing instructions to your bank that the bills are to be cleared on a certain day of the calendar month.    
• Use a datebook or reminder system: To help you remember when payments are due, mark the dates for all your bills on a calendar and/or set up phone or email reminders.  
• Sustain a budget: Check whether you have enough disposable income in your account to pay all of your expenses and adjust your spending as necessary to prevent going overboard and defaulting payments.  
• Talk to your creditors: In case you are having trouble paying a bill, get in touch with your lenders as soon as you can to let them know and to discuss alternative payment solutions.  

Conclusion 

A clean credit history can increase your chances of getting approved for loans such as a housing loan, business loan, or loan against property. To ensure you are credit-conscious and prepared for loans when you need them, keep an eye on your credit report frequently. If you find any incorrect information on your credit report, raise it with CIBIL and have it rectified.  

Also Read: Importance of CIBIL Score and Tips to Improve It