Past Due Accounts – Finance & Accounting

What Does Past Due Debt Mean?

Past-due debt is the money owed on a missed debt payment. For example, let’s say you receive a credit card bill of $1,000 with a minimum monthly payment of $50. If you don’t make that $50 payment on time (usually within a month), it will become past due. This delinquent debt payment will often accrue late fees and additional interest if not paid.

You don’t necessarily need to pay the full $1,000 at once—but you missed the required minimum payment, which caused a debt payment to become past due. 

Past-due debt can come in a variety of forms. Your debt can be due for utility payments, rent, credit cards, loan payments, and invoices. Essentially, any expense with a payment that isn’t made on time becomes past due.

The Grace Period

Some lenders allow a payment grace period beyond the due date, during which time your payment can be received without penalty. For example, if your payment is due on the fifth of the month and you have a 10-day grace period, you’ll be considered past due on the fifteenth of the month. It’s worth noting that this is different from the credit card grace period that gives you a chance to avoid interest charges by paying your balance in full.

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Penalties and Late Fees

Regardless of the type of loan contract a borrower has entered into, they have an obligation to make the required payments by the required due date. A borrower who does not make a required payment by the date due will get hit with some type of penalty. Keep in mind, many lenders have time cutoffs on the due date which the borrower must be aware of when making payments. For example, some lenders may require payment to be received by 8:00 PM Eastern Standard Time while others may allow payment up until midnight in the borrower’s time zone. If a loan payment is due by the 10th of the month and is not paid within the specified time constraints, the payment will be considered past due.

Late fees are one of the most expensive penalties that can occur for a past due bill.

Lenders can charge anywhere from $20 to $50 for a late payment.

This becomes a good source of revenue for the lender and also a charge that helps to cover some delinquency risks. Some lenders may not charge late fees at all. This can be a good feature to look out for when applying for new credit. When late fees are charged, they can be substantial and if they accumulate they can be difficult to pay off.

Credit Scoring

If a lender charges no late fees, a borrower will still be penalized by credit reporting which can affect their credit score. Payment activity usually accounts for the largest portion of a credit scoring methodology at around 35%. Most borrowers do not report delinquencies until after 60 days past due but if a payment is missed at any time a lender can report it. Delinquencies stay on a credit report for seven years. This is another reason they can be damaging. There is nothing a borrower can do to erase delinquencies, unlike paying down credit utilization, which is the second most important credit scoring factor.

60 Days Past Due Invoice Email

If an account is 60 or more days overdue, the likelihood that it will be paid drops significantly. At this point, your email should be strongly worded and include follow up phone calls. It should be sent to the primary contact and a manager if possible.

At 60 days, the email should be:

  • Bold – Include language that reflects the importance of the issue, like “requires your immediate attention”.
  • Urgent – Action needs to be taken and it needs to happen now.
  • Flexible – Offer to provide payment plans if needed.
ExampleDear Jeff,This is to inform you that your account is now 60 days PAST DUE. This requires your IMMEDIATE attention.Account Number Due Date Amount (includes X late fee)You may make a payment here: Payment optionsPlease let us know the status of your payment. If you need to set up a payment plan or have any other questions, please contact me at XXX-XXX-XXXX.Continued delinquency will cause us to close your account and refer it to a Collections Agency.We appreciate you addressing this matter.Sincerely,John

Negotiate a Pay for Delete

If you can afford to pay the past-due balance, it’s worth it to ask the creditor if they can re-age your account such that the delinquencies no longer appear. Creditors aren’t required to do this, but some will agree if this is the first time you’ve fallen behind on your payments. Send a letter to your creditor offering to pay the balance in full in exchange for them removing the delinquency from your credit history.

Understanding Past Due

Past due status can occur on any type of payment that has not been paid by the cutoff time on its specified due date. Payments past due are usually penalized based on the provisions of a contractual agreement. Credit agreements are one of the most common situations in which past due payments may occur.

An individual or business who takes out a loan or obtains any type of credit from a lending institution is expected to repay the loan according to the terms of the loan agreement. Lending products and loan agreements can vary drastically depending on the type of credit product offering. Some loans, like bullet loans, require a lump sum payment with interest after a specified period of time. The majority of loan products are on a monthly installment schedule which requires the borrower to pay some principal and interest with each payment. Lending institutions depend on the expected stream of cash flows outlined in loan agreements and will take penalizing steps when payments are not made on time.

Use Your Point Person

When you set up your original contract, you should designate who your contact at the organization will be. When mailing the letter, address the reminder to this specific person, not just the company. If the business manager’s name is at the top of the letter, she is more likely to tend to it immediately. If you are sending the letter in email form, send it to the person who can actually cut the check or authorize the payment.

The fewer hands the invoice has to be passed through at your client’s organization, the sooner you will receive your payment.

How Past Due Debt Affects Your Credit

The impact that a past due debt can have on your credit depends on how far behind on the payment you are. If you’re two or three days late paying your credit card bill, for example, there’s no real damage done, other than incurring a late fee. Once you become 30 days past due, however, your creditor can report your account to the credit bureaus.

Credit bureaus collect information about your various credit and loan accounts, including payment history, which is then used to calculate your credit score. Both your personal and business credit score incorporate payment data, although the way that information is used will vary.

A personal FICO score, for example, is based on payment history as well as other factors and it’s designed to paint a broad picture of your financial habits. PAYDEX scores, on the other hand, which are business credit scores issued by Dun & Bradstreet, are primarily an indicator of how likely you are to pay your financial obligations on time.

In either case, a poor payment history can result in a lower score, which could make obtaining small business financing more difficult. The damage to your credit can be compounded if a past due debt is sent to collections or charged-off altogether.

Holds

Holds, also known as negative service indicators, restrict access to university services. A hold placed on the student’s account may prevent the receipt of grades, transcripts, diploma or admission to athletic events, and registration will be denied for future terms.

Holds are viewable in ONE.UF:

  • Action Item Summary (which appears on top of the page)
  • Click on Holds to view details that will appear on the right side of the page

Types of Bursar holds include:

Types of Bursar holds include:

  • Financial – When a charge is not paid by the due date, a financial hold (negative service indicator) will be placed on a student’s account.  Past due charges must be satisfied to receive university services.
  • Exit Counseling – Loan borrowers separating from the University, applying for graduation or dropping below half-time status are required to complete an online counseling session.

How Long Do Late Payments Stay on Your Credit Report? 

Payment history is one of the biggest factors of your credit score. Your history lets lenders know how likely you are to miss a payment or become delinquent on the account. Because of its high value, a missed payment will stay on your credit report for 7 years, whether the missed payment is 30- or 90-days late. 

However, a missed payment might not affect your credit score for the full 7 years. If you only miss a few payments, then your credit score might rebound in a couple of years. Multiple factors  contribute to your credit score, and maintaining a good payment history is one of the best ways to keep it strong.  

How does a past due debt affect your credit score (and your chances of getting a loan)?

Most of the time, it comes down to how far behind you are on a payment and the type of debt. If you’re a few days late on paying your credit card bill, you’ll most likely just face a late fee, however, once you become 30 days past due, your creditor will likely report you to the credit bureaus. And once you’re 60 days past due, your creditor may even increase the interest rate — which can make paying off what you owe even more overwhelming.

This is where your credit score is at risk, and potentially, your chances of being approved for a small business loan.

Credit bureaus collect information about customer credit data, both personal and business, and lenders use these numbers to evaluate how risky you are as a borrower. While each credit bureau  has its own criteria and method of scoring, a combination of the amount of available credit you use, the length of your credit history, the types of credit you use, and your payment history, among other factors, all play a role.

In fact, when it comes to your FICO (Fair Isaac Corporation) score, which is arguably the most popular scoring system in the US for personal credit, payment history is the biggest factor — accounting for approximately 35% of the formula. And for many types of small business financing, your personal credit score can make or break your chances of getting approved — especially for younger businesses without an established business credit score.

Seek Consumer Credit Counseling

If you were caught up on your payments, but struggling to make the minimums every week, a debt management plan through a credit counseling agency might work for you. Unfortunately, some creditors will require you to bring your account current before they’ll agree to a lower interest rate and payment on a debt management plan. If you can’t afford to get caught up, then a credit counseling agency may not be able to help you save your account from charge-off.

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