Friday, August 3, 2012

Will Making a Credit Card Payment a Few Days Late Hurt My Credit Score?

Paying late can bring your score down
Even if you're normally on the ball about sending in your credit card payments on time, an illness, financial difficulty or even trusting your scatterbrained partner to pay the bills could result in your credit card payment being a few days late. You already know that leaving your credit card balance unpaid for a month could leave you facing a 30-day late on your credit report. Unfortunately, sending in a late payment to your credit card company can put you at risk of credit damage regardless of how late your credit card payment actually is.

Credit Card Company Reporting Programs

Credit card companies maintain automated programs to report your payment history to the credit bureaus. These programs keep a log of your credit card balance, when you make payments and how much you pay each month. The credit card company doesn't automatically send new information to the credit bureaus every time you make a purchase or payment. The automated system uploads data at very specific times. The state of your account at the time of the update dictates the information that ultimately appears on your credit report.

Keep track of payment due dates
So lets say that your credit card company's automated reporting program updates its data to the credit bureaus on the 15th of each month, and your credit card payment is due on the 10th. If you pay the payment on the 12th, you're in the clear. If you wait until the 16th to make your payment, your account was technically "late" when the credit card company made its report, thus you end up with a 30-day late on your credit report.

For the sake of argument, lets say your roommate Joe's credit card payment is due at the first of the month and his credit card company also updates its data with the credit bureaus on the 15th. Joe pays his bill on the 14th (paying on the day the system updates is too big a gamble). Although Joe's payment was two weeks late and yours was only five days late, he's in the clear while you end up with a glaring black mark on your credit report and a tarnished credit score. It all depends on when the system updates.

Late Payments and Interest Rate Increases

Watch out for higher interest rates
Your credit score isn't the only thing you have to worry about when you send in a late payment to your credit card company. The CARD Act prevents credit card issuers from increasing the interest rate on your existing balance simply because you were a few days late with a payment (unless you were 60 days late, then all bets are off) but that doesn't mean that the credit card company can't increase your interest rate on new purchases while billing your existing balance under the original rate. Let me say that again: The CARD Act does not prevent credit card issuers from increasing interest rates on new purchases. Many consumers have the mistaken idea that the prohibition on interest rate hikes applies to all purchases. Wrong. Your credit card company can, and probably will, raise your interest rate when you're a few days late paying your credit card bill – but they have to give you 45 days' notice before doing so.

The good news here is that The CARD Act requires credit card companies to review any accounts that have incurred an interest rate hike after six months. If you're paid all of your payments on time and been an all-around exemplary customer, they have to restore your original interest rate within 45 days of the review.

Credit Card Late Payment Fees

If you pay your credit card bill late – even a single day late – you can expect your credit card company to slap you with a fee. The federal government caps these fees at no more than $25 ($35 if you've had a previous late payment in the past six months). If you carry a low balance and your minimum payment is lowers than $25, your credit card company cannot charge you a late fee that exceeds your minimum payment. In case you're wondering, this is why so many credit card issuers are raising consumers' minimum payments to $25 regardless of how low their balances are.

Ultimately, paying your credit card bill even a few days late is playing a game of Russian roulette with your credit. I don't normally advocate giving credit card companies access to your bank accounts, but if you can't seem to remember to pay your credit card payment on time, setting up an automated draft with your bank can help protect you from fees, interest rate increases and, most importantly, the credit damage you could potentially incur by paying your credit card bill several days late.