A line of credit is an arrangement made with a lender that allows a borrower to borrow funds continuously, as long as certain conditions are met. One of the most common lines of credit is a credit card. There is no fixed loan for a credit card, but charges can be made on the line of credit, which act like mini-loans from the lender. A delinquent line of credit means that these mini-loans have not been paid off.
Legally, a line of credit becomes delinquent when a borrower does not make the minimum required payments 30 to 60 days past the day on which the payments were due. This means that the line of credit is in danger of going into default. At this point, the lender often stops the line of credit until payments have caught up with the payments that are due.
The delinquency status of a line of credit shows how many due payments have not yet been made. A borrower missing one payment is usually 30 days late in paying, while a borrower missing two payments is 60 days late. According to Office of Thrift Supervision/Federal Financial Institutions Examination Council (OTS/FFIEC) rules, the status is increased if a loan's monthly payment is not made by the loan's due date on the following month. According to Mortgage Bankers Association methods, the status is increased after an additional one-day grace period.
Effect on Credit
When a line of credit becomes delinquent, the borrower's entire credit history is affected. A delinquency is not as bad as a default, but it will still show up on credit reports for years afterward and will probably affect credit scores. This is why borrowers should always try to make their payments on time, since there is no way to reverse a delinquency mark even once payments are resumed.
After 60 Days
After 60 days, the line of credit is usually referred to as either past due or nonaccruing. A past due loan still has late payments, but at least some payments are being made by the borrower--usually simply not enough. A nonaccruing loan has not been paid off since the due date and has stopped accruing interest. Nonaccruing loans move quickly to default, depending on the buyer's circumstances.
Market investors who are watching the debt market, the housing market and other areas where loan and credit are important are especially interest in delinquency. Delinquency reports may show trends in loans before defaults actually began to occur, giving savvy investors an idea of future developments in markets controlled by loans.
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