Just one missed payment can damage your credit score

Your credit rating plays a big role in determining whether or not you can get a mortgage, a car loan or any debt you seek.

Maintaining a good credit rating, or FICO score is paramount to ensuring you can obtain debt and do so at a good interest rate.

Just one missed payment can have the single biggest impact on your credit rating, according to John Ulzheimer, a national credit expert.

Miss a payment or payments regularly, and your FICO score could take a hit by as much as 110 points if you have a credit score of 780, according to Equifax. Someone whose credit score has already taken a hit with a couple of late payments would see a smaller drop in points with another late payment.

“Then it all flows from there,” Ulzheimer says, adding that low-level delinquencies turn into mid-level and then high-level delinquency. Defaults lead to judgments, which sit on your credit report.

“The catalyst for all that starts with (one missed payment),” he says.

Unsecured debt is a higher source of default

Ulzheimer notes that people don’t default as much on secured debt as they do on unsecured debt. Secured debt is usually a mortgage or an auto. Unsecured debt includes credit cards and student loans.

Student loans are particularly challenging for borrowers. Student loan debt has the highest delinquency rate of all types of debt, according to data from the Federal Reserve Bank of New York.

As of the fourth quarter of 2017, student loan debt at $1.3 trillion came in a distant second to the $8.8 trillion in mortgages. Auto loans closed followed student loans at $1.2 trillion. Credit card debt sat at $834 billion.

New York Fed data shows that student loan debt has the highest delinquency of 30-plus days, followed by auto loans, credit cards and mortgages, respectively. Student loans lead the category in the 90-plus category. Then it’s credit cards, auto and mortgages.

Ulzheimer says his only words of wisdom on student loans is to pay them on time.

“If they default, it’s next to impossible to get out of paying the debt because it’s normally government guaranteed,” he says. “They’ll die with it, or pay it.” 

Overall debt is rising

Credit card debt has been climbing to levels last seen during the last recession. Debt peaked at the end of 2008, posting $866 billion in the fourth quarter, according to the New York Fed data.

Auto loans have been increasing at the same time, crossing over the $1 trillion mark in the third quarter of 2013.

A troublesome trend also has emerged in auto loans. Default rates on auto loans to people with fair to poor credit, known as subprime, have been rising along with the value of loans.

How to work through debt issues

Regardless of the type of debt, if you’re late on a payment or missed a payment altogether, your best first step is to get with the lender or credit card holder and have a conversation. With auto loans, it’s a way of holding off the bank from repossessing the vehicle.

The credit card company may cut you some slack and perhaps remove the late fee if you don’t have a history of late payments. After all, accidents happen.

Missing a payment with a student loan can have a big impact on your credit rating. The delinquency stays on your credit report for seven years, according to Experian.

With federal student loans, you do get some leeway. NerdWallet notes that federal loan servicers don’t report late or missed payments until 90 days. But you have to catch up with the balance owed before the 90 days. Private student loan lenders, however, will report at 30 days late.

While missed payments can hurt your credit, making the payments on time can help your credit. Unlike with other forms of debt, student loan lenders report that you made a payment. For young borrowers, this helps establish payment history on debt.

Credit experts recommend that you keep checking your credit to ensure no one has reported inaccurate information to the credit agencies. “If it’s incorrect you can dispute the info with either the credit bureaus or with the lender/servicer directly,” Ulzheimersays. “They’re obligated to fix it if it’s wrong.”

But if the information is correct, he says you will have to “live with it for 7 years, which is how long the law allows for negative payments to be reported.”