Explaining the difference between a late payment and a default to your customers

As an applicant’s repayment history for the last 24 months becomes a part of lender decision-making, lenders can expect to field plenty of questions on managing repayments for a better credit score.

It is important that the applicant most understands that late payment is a more influential indicator of distress than it has ever been.

Here is our insider’s guide to the three most important differences to mention when explaining how late payments and defaults vary:

LATE PAYMENTS

Late payments are between 14 days and 60 days and their impact on your credit score vary

If you pay the minimum repayment on your credit card or loan account after the “grace period”, which is more than 14 days past the due date, this can be recorded on your credit report as a “late payment”.

Late payments can be found in the Consumer Credit Liability Information section of your report.

It is unlikely that one late payment followed by making your repayments on time will significantly impact your credit score. However, a number of late payments could be an indication you are in financial stress and may negatively impact your credit score.

Late payments can be registered on small amounts of money

A late payment can be registered for any small amount that represents the minimum repayment on a credit account (like a credit card, a personal loan or a mortgage) at a point in time. Even a $5 account paid late is registered.

You have to wait 2 years before your past late payment history is wiped

Repayment history information is recorded monthly and can be held on your credit report for 2 years. This is displayed as a number indicating how many days in arrears an account was in a specific month.

DEFAULTS

Defaults occur after 60 days and are considered a serious influence on your credit score

A payment later than 60 days is a default. This will negatively impact your credit score.

The default information is found in the Overdue Accounts section.  

If you have a default on your credit report you can lessen the impact of the default on your score by making repayments on time. This more recent good behaviour can help improve your score.

Defaults are recorded on missed payment of $150 and over

A default can only be recorded on your report if you miss a payment which is more than $150 and is more than 60 days overdue.

You have to wait 5 years before a default is wiped from your credit report

A default is more serious and therefore remains on your credit report for 5 years.