Todd Christensen had a hard time making the $50 minimum payment on his first credit card, which he had used to charge $2,000 in less than 36 hours while he was a college student. Christensen's roommate, a finance major, advised him that sending any amount toward the balance would prevent the credit card company from reporting the account as late or filing legal action against him.
Christensen currently works as the education manager at Money Fit by DRS, a nonprofit debt management firm located in Idaho, and he realizes such advice could be more sound. The truth is that your lender could not even count the partial payment as payment, which might have much more dire consequences.
Are There Benefits To Making Partial Payments?
Partial payments "often do not fulfill creditor payment criteria," Christensen told The Balance via email. The term "partial payment" refers to a payment that is less than the minimum amount owed as defined by the creditor. Your account will be reported as 30 days late to credit bureaus if full payment is not made within that time frame.
This unfavorable information usually stays on your credit record for seven years. 1 In the end, you might owe thousands of dollars to your creditor if you only make partial payments, and they could sue you for breach of contract. If they end out on top, wage garnishment is an option they may pursue with your company.
Impact of Incomplete Payments
Sending in less than you owe through mail or email can have serious consequences, including but not limited to worse credit ratings and even jail time, depending on who you owe the money. We will look at the typical creditors, like banks and credit card companies, and the less typical ones, like your utility company.
Mortgages
The Federal Trade Commission states that loan servicers are not obligated to issue a credit if a borrower pays only a portion of their mortgage payment (FTC). You may receive a refund or have your payment held until you can pay the remaining balance for the month from another source.
And if your money does make it to the lender, more bad news awaits. If you don't pay when you're supposed to, it may ruin your credit, put you into default, and possibly lead to a foreclosure. 2
Money Orders
If you pay the minimum amount due on your credit card each month, the issuer may impose a penalty APR that raises your interest rate for all future transactions (APR). Your credit score may take a hit if your credit card company reports a partial payment agreement to the credit reporting agencies.
You may be able to negotiate a debt repayment plan with your credit card issuers through a nonprofit debt management agency, where your payments will be reflected as "full" payments even though you are actually paying back less than the original balance.
Finance For Automobiles
The vehicle loan company and the terms of your agreement will determine how your partial payment is treated. But according to Christensen, in many places, the lender can legally reclaim the car the day after you miss a payment.
Finances For College
A student loan account is considered overdue whenever a payment is more than one day late, and it will remain so until the loan total is paid in full or other payment arrangements have been made with the loan servicer.
All options are forbearance, deferral, and requests to modify repayment schedules to more manageable ones. You do, however, have 90 days to rectify the issue, which is more time than many other creditors give.
After 90 days of being 90 days or more behind on your student loan payments, the delinquency will be reported to the three major credit agencies.
Cash Advances
A late charge may be assessed if you make a partial payment without contacting your lender. Like a credit card, the lender may refuse to accept the payment or mark the unpaid balance as "past due." If you need to discover a solution, talk to your lender.
Tax Debt
Interest and late payment penalties may be assessed if federal taxes are not paid by the due date. In the worst instance, the IRS might make a legal claim on your assets, which would have repercussions on your credit.
In the meantime, the costs of late payments, such as interest and fees, will only increase. If you believe you can pay off your tax debt in full within 120 days, including any interest or penalties that have accrued, the IRS will consider allowing you to set up a short-term payment plan.
