Whatever is happening that is making your financial situation a bit tight lately, whether the dishwasher started leaking and had to be replaced or your car battery finally gave out, there are always those unexpected expenses that creep in and add up.
Problem is, these sudden emergencies can cut into your loan repayment budget and leave you wondering what to do if you can’t make your full payment by the due date this month. One commenter recently inquired about the effect partial payments would have on their credit, asking:
“Is it true as long as you make a partial payment that they cannot report you as late?”
It seems logical that some repayment would be better than none, right? We asked the experts to find out if this is really the case.
What to Do If You Know You Can’t Pay in Full
The unanimous response from the industry is that, just like many things in life, communication is key.
According to an email from Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions, the first thing you should do if you feel you may not be able to afford your full payment is to “read your loan agreement” and then “contact the lender to find out their policy on late payments.”
“In some cases you may be able to work out a payment plan,” John Danaher, president of TransUnion Consumer Interactive, said in an email. “If you don’t contact your lender and only make a partial payment, it will likely be reported as late.”
And late payments that get reported to one or all of the three major credit reporting agencies can really damage your credit, given payment history is the most important factor of most credit scores (more on this in a minute).
Nitzsche noted that being late with your lender and “being reported as a missed payment to the bureaus can be two different things.” This is why he emphasized that it’s also important to “understand your lender’s reporting policies.”
And, Nitzsche said, “generally, the better your credit [and] payment history with the lender” is, as well as how early you make them aware that you’ll be late on your payment or won’t be able to make it in full, the more options you’re likely to have. He advised speaking with your lender about the following options.
- Do they have a “skip payment” option? (Nitzsche said he has seen this “particularly on auto loans, where the lender allows you to skip a payment and put it on the end of the loan, typically with a nominal fee.”
- Can the loan be modified to make the payment more affordable?
- Can the loan be recast the make the future payments more affordable? (“This only applies if you have made extra payment(s) in the past and are ahead of your original scheduled payoff,” Nitzsche said.)
- Can the loan be refinanced before the due date, thus giving you a new due date and more time? (Note: this may only be worth it if you’re going to get a better interest rate.)
- Can you use a balance transfer offer from a revolving line of credit to make the payment?
- Can you use a balance transfer offer to transfer the entire loan balance?
What if This Doesn’t Work?
“If the lender won’t cooperate, or if [consumers don’t] see themselves being able to resume full payments on this and other debts after a few months, seeking financial advice from a non-profit consumer counseling agency or consulting with a bankruptcy attorney would be a helpful next step,” Barry Paperno, a credit scoring expert who worked at FICO for many years and now writes for SpeakingofCredit.com, said in an email.
How Payment History Affects Your Credit
“Paying your bills on time and in full each month is crucial to maintaining a healthy credit score,” Danaher said. “Making a partial loan payment is the same as not making a full payment from a lender’s viewpoint. The lender sets the terms of the loan with a clear plan for repayment, and any deviation from the plan could have a negative effect on your credit score.”
To see how your payment history is affecting your credit scores, you can review your free credit report summary, updated every 14 days, on Credit.com.
Image: londoneye
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