Creditors are the companies that are furnishing your data to the credit bureaus each month. When you apply for financing on a car, the lending company will pull your credit to see if you qualify for the loan and that inquiry will be added to your credit report. If you are approved for the loan and sign the contract, that new account will most likely appear on your credit report. It will list the amount of the loan, the term of your loan, and what your monthly payment amount is. Each month when you make your payment, they will send that data to the credit reporting agencies to be updated. That’s how your payment history is built.
If you make your payment after your due date, you’re veering into the danger zone. A few days can be okay, as most lenders have a grace period of around 15 days (check your specific lender’s policy on this so you don’t get yourself into trouble), but beyond that, you will incur late penalties and your lender can report the late payment to the bureaus. Late payments are typically reported at 30 days, 60 days, and 90 days late. There are degrees of severity, but any reported late payment will hurt your credit. In fact, it takes about 9 months for your credit to recover from a single 30-day late payment. A more serious delinquency of 60 days, 90 days, or more, will cause increasing damage to your credit, and it will take longer and longer to bounce back from.
After about 150 days of delinquency, the creditor will likely close your account in what’s known as a charge off. Make no mistake, a charge off is still debt you owe. The creditor is within their rights to take legal action against you if they want to. Technically if you do not pay it, you are responsible for the balance of the charged-off debt forever. But depending on your state, there are various statutes of limitation that give the creditor a certain amount of time to exercise their right to sue you over the unpaid debt. Although it’s relatively unlikely that they will, it does happen a lot. That’s something to consider if you are wondering if you should pay off the debt or not.
If you have an account that charges off, it’s better to pay it sooner rather than later. If you pay it off within a year, the action will benefit your credit and protect you from getting sued.
If the creditor who charges off your debt decides not to take legal action, they still have recourse. They can sell your debt to a third party collection company for pennies on the dollar, and the collection company will start attempting to collect the full amount. At this point, your credit situation has gone from bad to worse. The collection account will start reporting the amount owed as a new debt, and your credit report will still have all the derogatory items from your original creditor (even though they are obligated to report a $0 balance once they’ve sold the debt).
The most important thing to do in relation to your creditors is to keep the lines of communication open. Unlike collection companies, they are reasonable and generally respond well if you encounter isolated events in your otherwise good payment history. If you know you are going to be late, the very best thing you can do is let them know what is going on. They will be much more flexible if you inform them of your situation and tell them you plan to pay as soon as you can.
A reported delinquency will do damage to your credit, but ignoring or dodging your creditors will only hurt you more. Trust me, creditors have seen it all; it’s not uncommon for a borrower to struggle making payments from time to time. Whatever your situation, communicate it. Your creditors will appreciate the contact and be more likely to work with you. When you call, be polite and do your best to talk them into keeping the account open. You don’t want them closing it on you because when you’re able to begin making payments again, having the open account will help improve your scores.