Does Skipping a Car Payment Hurt Your Credit?

Understanding how car payments interact with your credit is important. This article clarifies the consequences of missing a car payment and outlines steps to consider when facing payment difficulties.

How Late Payments are Reported

When a car payment is missed, its credit impact depends on how late it is reported to credit bureaus. While a payment missed by only a few days may not directly affect credit scores, it usually triggers late fees. Creditors generally report a payment as late to Experian, Equifax, and TransUnion once it is 30 days past its due date.

The severity of the negative impact on a credit score increases with the length of the delinquency. A payment reported as 30 days late will hurt a credit score, but a 60-day or 90-day late payment will have a more significant negative effect. For consumers with excellent credit, the initial drop can be substantial, potentially 100 points or more for a 30-day late payment. Payment history is a primary factor in credit score calculations, often accounting for 35% of a FICO score.

A late payment can remain on a credit report for up to seven years from the original delinquency date. Its impact on the credit score lessens over time, especially with subsequent on-time payments and responsible credit habits. Lenders often prioritize recent credit history when evaluating applications.

Financial Implications Beyond Credit

Beyond the direct impact on credit scores, missing a car payment can lead to several other financial consequences. Lenders typically charge late fees if a payment is not made by the end of a grace period, which can range from 10 to 15 days, though some lenders may impose fees immediately. These fees can vary, often ranging from $25 to $50, or a percentage of the missed amount, and additional fees may accrue for each month the payment remains overdue. Such charges increase the total amount owed and can make catching up more difficult.

Continued missed payments can cause a loan to default, triggering an acceleration clause. This clause allows the lender to demand the entire remaining loan balance immediately. If the accelerated amount is not paid, the lender may proceed with vehicle repossession to recover the outstanding debt.

After repossession, the vehicle is typically sold at auction. If sale proceeds do not cover the remaining loan balance and associated fees, the borrower may still be responsible for the difference, known as a deficiency balance. Lenders can pursue collection of this balance, potentially leading to collection agency involvement or lawsuits. Missed payments and defaults can also result in higher interest rates or stricter approval for future loans.

Steps to Take When Facing Payment Difficulty

Proactive communication with the lender is important when facing difficulty making car payments. Contacting them before a payment is missed can open avenues for assistance and help avoid negative credit reporting. Many lenders offer programs for borrowers facing financial hardship.

Common options include payment deferral, allowing temporary skipping or pausing payments, or a payment extension that moves the due date. Loan modification is another possibility, where the lender may agree to change loan terms, such as extending the loan period or reducing the interest rate, to lower monthly payments. These programs aim to provide breathing room and protect credit standing.

Refinancing the car loan is a potential long-term solution to reduce monthly payments, especially if interest rates have dropped or your credit score has improved. Qualification typically requires a history of on-time payments, a credit score (often at least 600), and the vehicle meeting age and mileage requirements. Lenders also assess debt-to-income ratio to ensure new payments are manageable.

If other options are not viable, consider selling the vehicle, especially if there is negative equity (more is owed than it is worth). Selling a car with negative equity requires paying the difference between the sale price and the loan balance. While challenging, addressing negative equity proactively can prevent further financial strain and potential repossession.