Credit cards are instrumental in building up a strong credit history, as long as you use them properly and make payments on time. Late payments won't only incur fees: They'll lower your credit score and give you bad credit history.
How Late Payments Affect You
All credit-related moves you make--from how you pay your bills to how long your accounts have existed--appear in your credit report. Much of your financial history also affects your credit score. If you don't make your payments on time, your score will suffer the consequences. When your score is calculated, your information is examined and compared to other consumers with similar credit profiles. If you stack up poorly against other individuals with histories similar to your own, creditors will view you as a risk and will be less likely to offer lower interest rates when you apply for loans or additional forms of credit. Scoring models vary depending on the creditor, but they all view late payments negatively. Maxing out any line of credit, or owing an amount close to the maximum, will hurt your credit score.
FICO® Scores
Equifax®, Experian® and TransUnion® generate your credit reports based on your Fair Isaac Corporation (FICO) score. FICO scores incorporate a variety of credit data to determine your score, broken down as follows: • 35 percent of your credit score is determined by your payment history • 30 percent by the amounts owed • 15 percent by the length of your credit history • 10 percent by the types of credit used (credit cards, mortgages, installment loans etc.) • 10 percent by new credit activity (recently opened accounts, recent credit inquiries etc.). Your payment history comprises 35 percent of your FICO score, meaning that late payments affect more than a third of your total score. Late payments lower your score, but you can improve it by consistently making payments on time.
Preventing Late Payments T
o avoid late payments, set up automated bill-pay. Contact your creditors and tell them when you want to make payments and how much you can pay. Many services will deduct the specified amount on a monthly basis. You can repair bad credit, but it's a long and difficult process. If you begin having trouble making credit card payments on time, consider enlisting the aid of a financial advisor. Learn how a personal finance expert can help your credit rating, find solutions to your financial problems and provide advice on credit repair.