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What happens to my credit if I miss a payment on my loan?

Categories: Financial Tips, Credit Score

So you have a personal loan obligation, have been making payments (usually on time), but because of an unexpected financial burden, you’re now short on funds and can’t cover your next loan payment. What should you do? Can you afford to be late on the payment? Will you miss it altogether? How much will this cost? Will it impact your credit?


There are so many questions that may run through your mind if ever you find yourself in such a situation. We hope this article will answer all of your questions and help you understand the financial impact of being late, why a “credit score” is important, the consequences on your credit, and how that impacts your ability to borrow in the future. Afterwards, we will then be able to see if there are things you can do to keep the impact on your credit at a minimum.


What is a credit score?

When you apply for a loan, you provide the financial institution with information about yourself and your ability to pay back the loan you are requesting. You may also authorize the lender to reach out to credit bureaus and retrieve your “credit score”.

A credit score is a mathematical method for determining the creditworthiness of an individual. Credit scoring is determined by looking at a few specific factors including previous credit performance, new or recent credit inquiries, current level of debt, current balances, and type of credit availability.


Credit reporting agencies

There are three major credit bureaus: Equifax, Transunion, and Experian. All three of these bureaus use a different method for determining the scoring; therefore all three may have a different score for the same individual! Scores range from 350 – 850, with the higher scores being a safer risk in the eyes of lenders.

Note that some lenders may run a credit check with the major credit bureaus. Instead, they may use smaller credit facilities that hold consumer credit history.


Why credit scores matter

 An individual’s credit score will determine:

  • The kind of financial institutions they can borrow from when they need a loan. Some individuals with very low scores may be limited in their choice of lenders.
  • The loan amount the borrower will be offered. The loan amount may be limited if the score is low as the creditor may not be willing to take the risk.
  • The interest rate the borrower will be charged. An individual with a high credit score may be offered a lower rate because they represent a lower risk of default.
  • Whether collateral will be required to secure the loan. A borrower may not be approved for a personal unsecured loan, but would be approved for an auto title loan for example.


What impacts my credit score?

So now we know that having good credit is important! You may increase your borrowing power by making your payments on time, paying the correct amount, and then paying the loan off in a timely manner. Here are a few other tips for improving your credit score.

  • As mentioned, pay your loan payment on or before the due date.
  • Make sure that the minimum or proper payment amount is paid.
  • Avoid over-extending yourself.
  • Make payment arrangements if past due, and work to get back on track as soon as possible.
  • Never skip late payments, as this will only make the situation worse.
  • Keep your outstanding debt as low as possible. Do not continue to rewrite or increase loan amounts, unless it is absolutely necessary.


So, what happens to my credit if I miss a payment on my loan?

You could run the risk of lowering your credit score and your ability to borrow going forward. You could be turned down, or be limited to loans with higher rates, lower amounts, or shorter terms.

If you pay on time or payout your current loan, then the opposite may occur. With a good score, you may be approved for more money with a lower rate, and more time to pay it back.  This is why it is important to maintain a good payment history with your lender.


What can I do to minimize the impact on your credit?

 Don’t be “too” late. The loan agreement that you sign has a disclosure on late fees, usually labeled “Late Payment” or “Late Charges”. The financial institution may allow you a short window beyond the due date to catch up before charging you a late fee.  The statement should read “if a scheduled payment is 10 days or more late, you agree to pay…”. If at all possible, make your next payment before the grace period expires.

Catch up on your payments. As you can imagine, there is a big difference on the impact to your credit if you miss a payment then catch up and eventually pay off your loan vs. defaulting on your loan altogether. Defaulting on a loan can lead to foreclosure in the case of a mortgage, losing a vehicle in the case of an auto loan, or just losing the ability to borrow in the case of all loans. In order to maintain the ability to borrow, every effort needs to be made to pay back the loan.

Communicate with your lender. Most lenders want to work with their customers not only because they want to recover the money that they have lent, but they also want to continue the relationship that they have with the consumer. Communicating with them is very important. Why? Because you want to minimize the impact on your credit, right? If you let them know of the timing of your next payment, they may be willing to work with you without even reporting the delay of the payment, and therefore minimize the impact on your credit.


All and all, it’s important to remember that while lenders want to do what they can to help you during your time of need, you should also do what you can to remain in good standing with the company. By continuing to communicate with your lenders, making sure that you catch up on your payments, and doing what you can to not be “too” late, you should be able to minimize the impact on your credit if you fall on hard times when repaying your loan.


Related articles: Can an Installment Loan Affect My Credit?


For over 20 years, Always Money Finance has been a regional leader in providing affordable credit solutions to customers across the southeast looking for a convenient and confidential way to meet their needs. Getting a handle on your money takes time, and Always Money understands. If you’re in a jam and need immediate help, any of Always Money’s small personal loan options may be just what you need to get you going in the right direction. 

To get started,

  • Visit a store near you (Click here to find the store nearest you)
  • Call 1-888-618-9217 to get pre-approved over the phone, or
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