How to Handle Delinquent Accounts

Better-late-than-never is a popular idiom, but it isn’t particularly helpful for the millions of Americans who’ve fallen behind in credit payments and face the financial consequences of delinquent accounts.

An account is delinquent when a borrower fails to make a payment on time. Delinquent accounts have real consequences, the severity of which depends on the frequency of late payments, the length of the delinquency, and the type of credit involved.

The only real saving grace is that borrowers can adopt effective strategies to avoid this problem. Solutions include making automated payments, using nonprofit credit counseling, or adopting an effective debt management plan.

What Is a Delinquent Account?

A single late payment isn’t the same as an account delinquency, although it, too, should be carefully avoided.

An account is delinquent when you miss a payment by its due date and the missed payment is reported to the credit rating agencies. Delinquent accounts take a healthy bite out of your credit rating. That’s often after the first stage of delinquency – an account that is 30 days overdue – and it can seriously affect your financial standing for years to come.

Accounts in later stages of delinquency – 60, 90, 120 days – can be turned over to a collection agency or, in cases involving home or car loans, result in foreclosure or repossession.

Mortgage debt has been the driving force leading to a 5-year high in consumer credit delinquencies, but delinquencies occur with many types of credit.

“Forgetting to pay a credit card bill the first time may seem insignificant, but as the mistake rolls over the next month—when the interest hits you—it can start to build quickly,” Dennis Shirshikov, educational leader at FullMindLearning.com, said.

“Much like a client of mine in the past who defaulted into what became a nasty little high-interest rut after a slight misstep, showcasing how small delays can have big impacts as they roll out over time.”

How Delinquent Accounts Affect Your Credit Score

Delinquent accounts carry short-term and long-term impacts on a credit report and credit score.

A single delinquency can immediately affect your credit score. More serious damage occurs with multiple delinquent accounts or delinquencies of greater length (90 or 120 days). A Reddit user in February reported a drop of 133 points because of an unpaid student loan despite claiming his other credit accounts were up to date.

Payment history makes up 35% of your credit score, so it’s easy to see how missed payments over time can impact a credit score and make it more difficult to borrow money at reasonable interest rates.

“The immediate effect of delinquency differs from type of credit to type of credit,” Shirshikov said. “Credit card delinquencies are reported without delay and can quickly damage your score, while mortgage delinquencies often have a lengthy process and legal protections, but if left unattended, result in foreclosures.

“Personal and car loans, by contrast, tend to have less flexible repayment schedules — missed payments can lead to extra fees or repossession of collateral.”

Signs That Your Account May Become Delinquent

One common sign that an individual might risk credit delinquency is making only minimum payments on credit cards. It’s called “minimum” because it’s the least you can do to avoid late fees, but by making only the minimum payment, your debt continues to grow, often at an exorbitant interest rate.

Failing to budget responsibly can leave individuals overextended, especially when emergencies, small and large, occur. If you find yourself missing payments, or using cash advances or balance transfers, take that as a sign to re-evaluate your spending habits and make sure those spending habits reflect changes in income or rising costs due to inflation.

“The greatest way to prevent delinquency is to stay on top of payments, which entails scheduled automatic payments, reminders, and a strict budget to guarantee everything gets paid,” Bill Lyons, CEO at Griffin Funding, said.

Steps to Handle a Delinquent Account

There are several steps individuals can take to address and manage a delinquent account:

• Contact creditors to resolve the issue as soon as possible. “As long as someone has a good standing history of on-time payments with a creditor, lender, or service provider, reaching out to them should generate alternative payment solutions due to the good faith effort, rather than a non-payment,” Lyons said.
• Inquire about negotiating a friendlier payment plan. This will be easier, of course, if you don’t have a history of missed payments.
• See if you qualify for a hardship program for a verifiable issue such as job loss, reduction in income or high medical bills.
• Ask about a forbearance that allows you to postpone payments for a set period of time.
• Prioritize your debt.

“I’d prioritize high-interest accounts and try to get everything as up to date as possible sooner rather than later,” Lyons said. “If I’m unable to resolve this on my own, I’d also contact a credit counselor who should be able to help me figure out a reasonable plan that gets me back on track over time.”

How to Remove a Delinquency from Your Credit Report

Because delinquencies stay on credit reports for seven years, you might begin to think you’ll never be done with it.

That’s why monitoring credit reports is always a good idea, especially since there could be discrepancies between your Equifax, Experian, and TransUnion reports.

If you have a long history of delinquency, you’re probably out of luck getting a delinquency removed. But if you identify an inaccuracy, you can dispute it directly with the three credit bureaus, which are legally bound to investigate such disputes.

You can also contact the creditor involved in the delinquency you’re contesting, set up a payment plan or simply prove you have already paid off the debt that is now considered delinquent.

“Though delinquencies generally remain on your credit report for seven years, some non-standard measures may lead to their earlier removal under certain circumstances,” Shirshikov said. “One is to negotiate a “pay for delete” agreement with the lender, whereby the creditor agrees to delete the delinquency after the debt is paid.”

Options for Debt Recovery and Consolidation

Delinquency doesn’t happen overnight and is rarely intentional. If you have credit problems, don’t be afraid to reach out for help. Solutions such as debt consolidation, which consolidates what you owe in a single payment, can be the answer, but the terms of debt consolidation are less attractive if your credit has already taken a big delinquency hit.

Budgeting strategies can reduce expenses. Coupled with a nonprofit credit counseling debt management plan (DMP), it can be the surest way to tackle existing debt at a negotiated lower interest rate and get on the path to being debt free in 3-5 years.

“Besides making tighter budgetary choices, look into alternative programs or community-based financial education services,” Shirshikov said. “That’s exactly what I advised a client who, through a combination of debt consolidation and cash-flow counseling, was eventually able to rejuvenate his credit profile and financial footing.”

How to Avoid Delinquent Accounts in the Future

If life comes at you fast, debt can come at you even faster. Just know there are steps you can take to avoid delinquent accounts, including:

• Setting up reminders and alerts when bills are due.
• Making automated payments so a busy week or medical emergency doesn’t land you in credit delinquency.
• Building an emergency fund. Sure, it’s easier said than done, but when a calamity hits, you need a cushion that doesn’t involve taking out a loan or using a credit card.
• Monitoring your credit report and your credit statements. Ignorance is not bliss when it comes to debt.
• Contact your creditor immediately if you have an unpaid statement or a late payment. Effective communication won’t pay the bill, but it might help keep your account out of delinquency.
• Cutting out unnecessary expenses (subscriptions, the daily $6 latte, etc.)

Take a hard look at everything. Smart budgeting is the foundation of managing debt.

“It’s all about proactive money management — putting your bills on autopay, checking in with your budget, creating an emergency fund to cover those unexpected bills and the like,” Shirshikov said. “Many have found that putting regular check-ins into the calendar not only keeps future problems from becoming crises but creates a buffer against small mistakes.”