5 Steps To Take Now If You Expect To Miss a Debt Payment

When you took out a credit card, auto loan, mortgage, student loan or other kinds of debt, you probably thought you’d easily be able to make all of your payments on time. But sometimes life happens, and a job loss, financial emergency, or other unexpected issue could cause you to miss a debt payment.

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If you expect that you’re going to miss a debt payment , these steps may help you catch up and minimize the impacts of the missed payment.

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1. Contact Your Lender

Kyle Enrich, President of Achieve Lending in San Mateo, California, explained that if you think you’re going to miss a payment, contacting your lender as soon as possible may help. Your loan servicer might be open to structuring a different payment plan, which could help you to make your payments more easily.

“A mortgage loan servicer may offer help in the form of loan modification or loan forbearance, which means asking for more time to pay,” said Enrich. “That could entail suspending or reducing monthly payments, but does NOT eliminate your full obligation to pay over an agreed-upon period of time.”

Contacting your lender may help you avoid a fee for that missed payment. Martin Lynch, President of the Financial Counseling Association of America (FCAA), explained that the late fees lenders charge for missed payments can quickly add up and make it difficult to catch up again. “That’s why, if a struggling borrower makes contact with their creditor when they’re about to miss their first payment, the lender may agree to waive that first late fee,” said Lynch. “They don’t want to see you fall behind, either.”

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2. Try To Find a Way To Quickly Make the Payment

Missing a payment can have several implications. In addition to potentially facing late fees that can accumulate until your payments are current again, missing a payment can harm your credit. Lynch explained that while credit reporting is entirely voluntary in the United States, many creditors choose to report your accounts to keep the system as full of accurate information as possible. “Lenders report on a monthly basis, and those negative items generally stay on your report for seven years,” he said. “By contrast, good information, such as accounts paid in full, can stay on your report for up to 10 years.”

According to Enrich, a missed payment, like a mortgage payment, will almost certainly negatively impact your credit scores, but the significance of the impact depends on many factors. Your previous credit score, your credit history, how you use credit, and whether you’ve had any other missed payments will all impact how much your score might drop. “Keep in mind that payment history is the largest factor in credit score calculation,” said Enrich; it accounts for 35% of your score.

Lynch recommended keeping the damage to a minimum and getting back on track with your payments as quickly as possible. Even if your credit score has been lowered, try not to brood on it. “Remember that every month, your missed payment recedes further into the past, and even though it may be on your credit report for seven years, it counts against you less and less as time goes by,” said Lynch. “Credit scoring formulas are really focused on the most recent 24 months of activity.”

Enrich suggested that the simple step of making a budget can be surprisingly effective in helping people make their debt payments. Create a budget so you know your monthly income and expenses. “Use a good free app, a spreadsheet, or pencil and paper,” he said. “In some cases, when people get a realistic look at their finances, they can make adjustments and cuts, allowing them breathing room to make their payments.”

3. Explore a Hardship Program

If you’re experiencing a hardship, like job loss or major medical expenses, contact your lender to explore any hardship assistance programs they might have. Lynch said that many borrowers have such programs in place, but you’ll need to reach out and fully and honestly explain your situation to potentially get help.

Elrich suggested exploring other hardship programs, too. “Sometimes, getting help with other expenses can free up money needed to make those payments on secured debts,” he said. You may want to explore these available resources:

• Local utility companies may offer hardship assistance
• The Supplemental Nutrition Assistance Program provides low-income families with benefits to supplement their grocery bills
• The U.S. Oncology Network offers a search-by-zip-code directory of services that can help with food, housing, merchandise, transportation, healthcare, and more – these resources aren’t restricted to oncology patients

4. Contact a Loan Counseling Agency

Lynch suggested that you consider contacting an FCAA non-profit counseling agency after contacting your lender. Gathering up your most recent statements and budget figures will make the counseling process easier, and counselors will review your credit report and your options without requiring that you become a client. “Many creditors agree to lower their rates and waive late or over-limit fees if the borrower receives counseling from our agencies,” said Lynch.

5. Catch Up on Payments and Work on Rebuilding Your Credit

Once you can catch up on your debt payments, you can focus on rebuilding your credit. Elrich recommended that you review your credit report to understand where you’re starting from.

Elrich noted that one credit card is plenty and that using multiple cards to build your credit profile is unnecessary. He also highlighted the importance of keeping your credit utilization – the percent of your available credit you actually use – low. “There’s no magic number, but it’s best to keep it as low as you can.”

You might be tempted to open several accounts to rebuild your credit, but doing so can backfire. “Always bear in mind that although any damage you might have done to your credit score reduced your score quickly, rebuilding credit is a much slower process,” said Lynch. For example, if you have only one or two open accounts, opening five credit cards overnight would cause your credit score to drop.

Instead, the credit rating system favors a diversity of credit. “Broadening your profile by maintaining a store or retail card, a car loan, a major credit card, etc. will give future lenders a better idea how you’d repay them if they gave you a loan,” said Lynch. “That’s what credit scoring is really all about.”

This article originally appeared on GOBankingRates.com : 5 Steps To Take Now If You Expect To Miss a Debt Payment