What to do if you miss payments (and how to help prevent them from happening)

If you’ve made thousands of on-time payments over the course of your life, it’s reasonable to think that one missed bill wouldn’t be a big deal.

But you’d be wrong.

A recent Reddit thread went viral for pointing out that one missed student-loan payment sunk the poster’s credit score by more than 200 points – from a stellar 808, down to 587.

To be sure, some specific circumstances led to that cratered score: 90 days late, a bank that closed down, a new baby that left him distracted and sleep-deprived, and reminders that were dumped into spam folders. 

But the key point is that even one missed payment can have serious ramifications for your financial life, and you essentially need to be on your guard at all times.

“We see this happen more often than people think,” says Joon Um, a financial planner with Secure Tax & Accounting in Beverly Hills, Calif. “One missed payment can cause a big drop, because payment history is the biggest factor in a credit score.”

Indeed, payment history accounts for 35% of the widely used FICO credit score, according to the company. That’s followed by other factors like amount owed (30%), and length of credit history (15%). Payment history is even more heavily weighted in the competing VantageScore model, making up 41% of the total.

But the reality is that no one is perfect, and sometimes mistakes are made not only by borrowers, but lenders, too. Perhaps a bill was misdelivered, or was stashed in a drawer and forgotten about, or e-mail alerts got overlooked.

It happens. But the key is to prevent late payments from occurring in the first place, and to act quickly if something does slip through the cracks. A large credit-score drop can have rippling effects through the rest of your financial life from your ability to qualify for a car loan or mortgage, or to be approved for a rental apartment, or even to get hired for a job.

Here’s what you need to do, to set up multiple lines of defense:

-Automate payments. Taking the responsibilities of monthly bill payments out of your own hands is really the best strategy to avoid any potential missteps. “Set up all your bills on autopay,” advises Ryan Kelly, a financial planner in Vienna, Va.

Regular charges can be handled automatically either using a credit card, or drawn directly from your bank account and then you never have to worry about timeliness again. Just make sure there is enough money in your accounts to cover those regular bills, otherwise you could face overdraft fees or failed transactions.

-Dispute errors. Lenders are human, too, and also make mistakes. According to one study by the magazine Consumer Reports, 44% of people who checked their credit report discovered at least one error.

So if a late payment was incorrectly logged on your credit record, perhaps a clerical mistake, or perhaps a debt owed by someone else with the same name, you could be paying a heavy price for something that wasn’t even your fault.

But you can’t fix what you don’t know so check out your reports at major credit agencies Experian, Equifax and TransUnion, and start fixing any errors that have popped up. The Consumer Financial Protection Bureau has compiled a useful rundown of how and where to do so.

Even if a late payment was legitimately your fault, companies will occasionally erase that notification once the bill is paid up. Says Um: “Sometimes they’ll remove the late mark as a goodwill adjustment, especially if it’s the first time.”

-Rebuild. Let’s say that a late-payment report to the credit agencies was accurate, and you’ve exhausted other avenues to get it lifted from your report. At that point, all you can do is work diligently on rebuilding that credit score.

That means making all payments on time, reducing your credit utilization ratio (the percentage of your total credit access you are actually using), and perhaps trying products like a secured credit card, such Current’s Build Card. Funds are held in reserve as you spend to pay your bill at the end of each month. These monthly payments are then reported to the three major credit bureaus mentioned above. Members have an average credit score increase of 81 points within six months of using the Build Card.

“One missed payment may hurt in the short term, but you can often rebuild within months, not years,” says Kelly. “I once worked with a young couple who was struggling with some medical bills and credit card debt, and in just three months they reviewed and corrected some errors on their credit reports, negotiated down and paid off their medical bills, and improved their credit scores by over 100 points.”