How automatic payments can help you build better credit

March 30, 2021

Keeping track of all your monthly bills can be overwhelming. Between rent, utilities, student loans, Netflix, your meal delivery service, and those pesky credit cards, it’s a lot. And unfortunately, utility companies, credit card companies, and all your other monthly service providers don’t get together and coordinate dates for when your bills are due – we have to stay on top of those ourselves.

But if you miss just one credit card payment, your credit score could take a big hit.

To prevent this from happening, consider automating your credit card payments. Automatic payments can ensure you never accidentally miss a due date and consequently trigger negative activity on your credit report. A missed payment on your record can be difficult to wipe clean, which is especially frustrating if you’ve otherwise proved yourself a worthy borrower.

What happens when I miss a payment?

To understand how a missed credit card payment affects your credit, it’s first important to know that you have more than one credit score. In addition to the FICO® Score, which is the score most lenders use, there are other credit scoring systems such as Vantage Score. Additionally, the three credit bureaus – Equifax, Experian, and TransUnion – have their own proprietary credit scoring systems which generate “educational credit scores” for consumers.

For simplicity’s sake, we’ll discuss the impact of a late credit card payment on your FICO® Score. If you miss a payment, the good news is that the credit card company will only report the missed payment if it’s more than 30 days late. Although you’ll still be hit with a late fee, you have a grace period to make the payment before it negatively impacts your credit report.

However, once you’ve passed the grace period, the impact on your credit score can be severe and long-lasting. There’s no way to tell exactly how many points your score might drop if you miss a payment, but we do know that 35% of your FICO® score is determined by payment history.

Because your score is impacted so heavily by payment history, a single late payment could possibly drop your score by dozens of points. A credit damage data report released by FICO® in 2019 showed that consumers with a high initial credit score could experience a drop of up to 180 points for a single missed payment that is late for more than 90 days. You read that right: 180 points!

Perhaps the worst part of missing a credit card payment is that the activity will remain on your credit report for up to 7 years. The impact of a late payment on your score will lessen over time, but a late or missed payment can tarnish an otherwise squeaky clean report for a long period.

What exactly is an automatic payment?

To prevent these negative effects from ever happening to you, it may be worth considering setting up automatic payments to your credit card and other recurring monthly bills. Not only will automatic payments prevent you from missing a payment by accident, but consistent on-time payments will also help to improve your credit score.

You can set up automatic payments through your checking account or directly through your credit card account. When you set up automatic payments, you’ll select a date for the payment to go through each month and the amount you’d like the payment to be.

If you’re working on getting out of debt and are only able to make the minimum payment, then the checking account option may be best. But if you’re able to pay the whole balance (which we recommend), then consider setting up automatic payments through the credit card company because the amount of the balance will vary from month to month.

Are automatic payments right for me?

Although automated payments sound like an easy time-saver, there are a few disadvantages to be aware of before you go set up all the automatic payments your heart desires. These disadvantages include:

  • Risking an overdraft on your checking account
  • Choosing the wrong recurring date for the payment to go out
  • Missing mistaken or fraudulent charges on your credit card statement

If you struggle to maintain a positive balance in your checking account, automatic payments could result in expensive overdraft fees. The average overdraft fee in 2020 was just under $34 per transaction, which adds up quickly if you charge more than one transaction after the initial overdraft. (Check out our post about bank accounts to find recommendations for banks that don’t charge overdraft fees!)

Second, if you don’t choose a date for the automatic payment to go out early enough, you could still end up paying late fees to your credit card company. There could be a lag in the amount of time it takes for your payment to process and post to your credit card account, so choose a recurring date that’s a few days before the due date to avoid costly late fees.

And finally, automatic payments can trick us into becoming overly trustworthy. When we don’t routinely check credit card bills and statements, we won’t notice if the credit company has accidentally made a mistake such as withdrawing a payment twice. No one should pay the credit card company twice for the same charge – they make enough money as is.

Perhaps even worse, we may not notice right away if our credit card has been compromised and someone else has been using it to make purchases. So if you do set up automatic payments, make sure you’re still reading that statement and watching the charges like a hawk.

Watch your credit score improve over time

Ultimately, if you set up automatic payments while keeping a close eye on the funds in your checking account, the payment date you’ve chosen, and your monthly statements, we think automatic payments are a great organizational and time-saving tool for your busy life.

Keep in mind that there’s no quick way to improve your credit score. Improving your creditworthiness requires you to play the long game and consistently make good choices. Automatic payments are one way you can be consistent without having to do extra work – and they take away the worry that you might forget to make on-time payments each month which, as you’ve seen, can have unpleasant consequences.

But credit bureaus and lenders alike prefer having multiple ways to judge your creditworthiness. They get a better understanding of your eligibility as a borrower when they can see you’ve been consistent in more than one area of your finances.

If you’re looking for other ways to improve your credit score so you can buy a home, get better interest rates, or make another big purchase in the future, consider opening an account with Loqbox. Our unique credit-building solution allows you to save money and build your credit at the same time. For free. Learn more about how we work to see if Loqbox might be the solution you’ve been looking for.

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