Canadians often juggle many payments at once. While some are able to manage their expenses, others may struggle to pay bills on time due to financial missteps, lower wages, emergencies or even simple forgetfulness. Unfortunately, missing a payment is one mistake that can have serious consequences on your financial health.
What Exactly Is Considered A Missed Payment?
In general, any payment made within 30 days of the billing statement is on time. A payment is considered missed or late when you don’t make at least the minimum payment by the due date indicated on your bill or statement.
When Are They Reported To The Credit Bureau?
In Canada, lenders and creditors use a code system to report both on-time and missed payments to the credit bureaus. This coding system is called a credit rating. It uses numbers between 0 and 9 to represent whether you make your payments on time. For example, a credit rating of 1 indicates you’ve made your payment on time while a credit rating of 2 means you’ve missed a payment. Depending on how late your payment is, the information your lender provides to the credit bureaus will differ, which will affect your credit rating. Here are the credit ratings for late payments:
| Credit Rating | Days Late |
|---|---|
| 2 | 31-59 |
| 3 | 60-89 |
| 4 | 90-119 |
| 5 | 120+ |
| 9 | 120+ |
As a result of this system, lenders and creditors typically report your missed payments in 30-day increments (starting at 30, then 60, then 90). However, if you’re more than 120 days late, your creditor can report with a rating of 5 or as “bad debt” or “sold to a collection agency” with a credit rating of 9.
Whenever you miss a payment, there are certain steps creditors take to mitigate this behaviour, whether it’s late fees or a bruised credit score, there are many consequences to missing a payment. Here are the most common:
1. Late Fees – Whether you’re 1 day late or 5 days late, you’ll be charged a late fee by your lender or creditor. These fees can easily range from $25 – $50 and can add up very quickly if you continue to miss payments.
2. Credit Score Decrease – Your payment history has the most influence on your credit score so missing payments can significantly lower it. Plus, the longer you don’t pay, the more it will affect your credit.
3. Interest Rate Increase – Some lenders and creditors will penalize late or missed payments by increasing your interest rate. When you miss a credit card payment, your APR can shoot up as high as 29.99% which means the amount of interest you’ll pay on your balance increases and it will most likely take you longer to pay it off in full.
4. Introductory Interest Rate Cancellation – If you’ve been enjoying a limited time lower interest rate, you may be cut off from the offer as a penalty for missing or late payments. Many financial institutions provide programs like this to encourage keeping your accounts in good standing and rewarding good payment behaviour.
If you’re concerned about penalties for late credit card payments, try to make at least the minimum payment. It’s not advisable to continue doing this though, as continuous minimum payments can lead to an unmanageable amount of debt.
Why Do Missed Payments Affect Your Credit Score?
A credit score is calculated based on five main factors: payment history, credit utilization, credit mix, credit length, and credit inquiries. Each of these factors accounts for a certain percentage of your credit score, with payment history accounting for a little more than a third (35%). To learn more about credit scores and how you can improve yours, check out our blog.
How Can You Avoid Missed/Late Payments?
In order to avoid the not-so-nice consequences of missed or late payments, consider setting up automatic payments so your credit card issuer has the authority to access your account to pay the balance. You can also set up alerts so nothing gets missed, or create an emergency fund where you can drop cash when you have it for times that you may be a bit tighter financially.
Missed or late payments can have a huge impact on your credit score, so take the time to ensure you’ve set yourself up for success when it comes to being on schedule and prepared to make payments when they’re due. As a reward, you can expect better rates and financial opportunities down the line. Contact us to learn more about your options!