There may come a point where you end up missing a repayment for a loan or credit card that you have taken out, perhaps as a result of an unexpected financial emergency, or maybe just simply not having kept a track of your finances that month.
One of your first thoughts will be how quickly you can rectify the situation and pay the lender back, but have you also considered that this late payment could affect your credit score negatively? All The Lenders takes a look at how this works, as well as what you can do to also minimise the impact.
How do lenders see missed payments?
Lenders are able to see any missed payments through checking your credit report. When applying for a loan or credit card, the lender will typically purchase your information from a credit reference agency (Equifax, Experian or Call Credit) and this information is usually fed into their system in a way that is automated so checks can be run quickly.
When reviewing your credit file, there will be a list of your recent transactions, including any outstanding debt, missed payments and payments made.
It is important to note that lenders will expect to see one or two missed payments in the average person’s credit history, and these are not usually an issue provided that they get paid eventually.
How long do missed payments stay on my credit file?
If you have a late payment marker recorded on your profile, this will be visible to prospective lenders for a period of 6 years.
The same applies for bankruptcy and CCJs. Simply just having a debt collector ‘searching’ your credit file can remain on your record for 2 years.
However it is important to note that each of the main credit reference agencies (Experian, Equifax, Call Credit) report this differently. What this means for you is that missed payments may still be visible to lenders checking your file even after the six years have passed.
It can impact your ability to get credit
The more recent the missed payment is, the harder it will be to get accepted for a loan or credit card. This is because lenders may be concerned that you are currently having difficulty being able to manage your debt.
If missed payments are something that occur on a regular basis, this will signal alarm bells to the lender that you pose a higher risk.
The nature of credit reference agencies mean that they report in real-time so any recent transactions or missed payments are recorded immediately and made available to the next supplier who checks your credit file.
If you are struggling with missed payments on a regular basis, you should look at contact a debt advisory service who can provide you with independent support and guidance as to how you can get your finances back on track.
How credit can affect your chances of getting a business loan
Poor credit or missed repayments will also restrict any businesses or startups looking for seed capital or investment. High street banks and lenders will commonly look at your credit rating and recent payment history to determine whether you are eligible for a business loan.
If you have a number of missed repayments but are looking for funds for your business, you can look at getting personal guarantees by another trusted individual.
This can be someone you know who is the director of another company and has a good credit rating to back up your application. It essentially means that if you default, this person will step in and pay your debts on your behalf.
Other options include trying to raise money through crowdfunding, whereby investment is based more on your business idea and its potential for growth, rather than your repayment history.
Can you prevent a late payment marker?
Once you have received a late payment letter, the creditor will usually give you a short period of time in order to settle your finances before a late payment is reported to the credit reference agencies.
This is why you should do everything you can to make the payment as quickly as possible after receiving the letter. Ignoring it will mean it is far more likely that the marker will be recorded on your file, and this can impact your credit score and make getting approved for loans or credit cards harder in the future.
More on business funding
ByteStart is packed with help and tips on all aspects of finance your business. Check out some of our most popular guides;
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- What to do when the bank says “NO”
- 5 Ways to unlock finance for your startup
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- A Start-Up’s Guide to the Seed Enterprise Investment Scheme (SEIS)
- What is Invoice Finance and how can it help my business?
- A Guide to business credit cards and using them as a short term funding solution
- Improve your cash flow – 7 ways to make sure your business gets paid on time, every time
- 10 Late payment excuses used by customers and how to deal with them