Creating and maintaining a good credit score is an important factor in one's financial health. It is important to control your credit card bills and make payments on time to maintain a good credit history. Delinquent payments can have severe consequences on your credit score and the interest rates you’re charged on your credit cards.
What Is a Line of Credit?
If you get approved, a credit card company will issue you a line of credit. This line of credit will have a maximum limit that will vary from a few hundred dollars up to several thousand dollars.
When you make charges on your credit card, they will appear on your monthly statement, and you will have at least 20 days from the statement date to make a monthly payment. You can either pay off the full amount of the charges or make a partial payment as long as the amount is above the minimum payment requested by the credit card company.
What Is a Delinquent Line of Credit?
Technically, any account that has passed the due date without payment is considered delinquent, explains Experian. However, most credit card lenders don't report an account as delinquent to the credit bureaus, such as Equifax and Transunion, until the account is more than 30 days past due.
Credit card companies will charge expensive late fees if a payment is made after the due date. In addition, the Consumer Financial Protection Bureau warns they may also increase your interest to a penalty rate, which can be temporary for up to six months or may become permanent if you have a history of making delinquent payments.
The Federal Reserve Bank tracks consumer credit card delinquency rates and issues a report each quarter of the year. During the recession of 2008-2009, credit card delinquency rates hovered around 5 to 6 percent. However, more recently in the second quarter of 2022, the delinquency rate was a little over 1.8 percent.
How Do Delinquent Payments Affect Your Credit Score?
Delinquent payments will have a significant negative effect on your credit score and will stay on your credit report for up to seven years. Payment history is one of the most significant factors that affect your credit score.
If your account goes more than 180 days delinquent without any payments, the credit card issuers will classify it as a charge-off that will be recorded on your credit report, leading to further downgrading of your credit score.
While a credit card delinquency can hurt your credit score, there are ways to recover and earn a higher score.
How to Rebuild Your Credit After Credit Card Delinquencies
Even though late payments will drag down your credit score, you can recover over a period of time. The negative reports of late payments will eventually drop off your credit history and will have less effect on your credit score as time goes on. Here are a few steps you can take to get on the road to improvement.
- Manage your debts and cash flow to make sure you make your credit card payments on time and avoid any late payments.
- Set up automatic debits from your bank account to make payments to your credit card accounts if you sometimes forget to make the payments manually.
- Control your credit card debt and try to keep your utilization rate under 30 percent. This means if your credit cards have a total maximum limit of $5,000, you should keep your credit card balances to less than $1,500 ($5,000 times 30 percent).
- Review your credit reports regularly and file disputes for any inaccuracies or incomplete information, advises the Cornell Law School Legal Information Institute.
- Set up an emergency fund to have cash available to make credit card payments in the event of any shortfalls in your income.
- Create a reminder system with alerts on your cell phone or computer to let you know when payment due dates are coming up.
- Experian: What Is a Delinquency on a Credit Report?
- Consumer Financial Protection Bureau: When Can My Credit Card Company Increase My Interest Rate?
- Federal Reserve Bank: Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks
- Legal Information Institute: Procedure in Case of Disputed Accuracy
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.