Whether you’re paying for college, buying a house, or starting a business, it’s common to take on debt at some point in your life. Repaying that debt typically involves making a fixed or minimum monthly payment by a certain day each month.
But what happens if money is tight and you don’t have enough to make that monthly payment?
It might seem like making a partial payment is better than paying nothing at all. However, that’s not necessarily the case. Depending on the lender or creditor, a partial payment may be looked at the exact same way as a late or missed payment.
Though partial payments might help lower your balance and reduce the interest that accrues on your debt, lenders and creditors generally don’t see them as on-time payments and may still consider your account as in default.
If you’re thinking about making partial payments, here’s what you can expect to happen — and what you can do instead.
What is a Partial Payment?
A partial payment on a debt is any payment smaller than the minimum amount due, as specified by the creditor.
Credit cards have minimum payment amounts, which can vary depending on your balance and annual percentage rate (APR). Other types of debt, such as car loans and mortgages, typically have set monthly payments that don’t vary as much.
Partial payments typically do not typically satisfy a creditor’s payment requirements for loans, credit cards, and other debt. And, not paying the full amount could be treated the same as a missed payment.
Why Do Customers Make Partial Payments?
Generally, customers make partial payments if they’re dealing with financial hardship or other money issues that make them unable to cover all their monthly expenses.
Even a sound budget can go off the rails when emergency expenses, such as medical bills or car repairs, arise. When bills are due, paying for necessities, like food, housing, and utilities, are usually a higher priority than long-term debt.
People who are out of work due and collecting unemployment benefits may also consider making partial payments on debt for a period of time.
An unexpected turn of events, such as job loss or a major bill you didn’t see coming, are examples of why financial experts recommend starting an emergency fund. Ideally, you’d have three to six months’ worth of basic living expenses socked away.
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Does a Partial Payment Affect Your Credit Score?
It could. If you pay less than the minimum amount due on a credit card or loan, it likely won’t satisfy your creditors, and they will still consider it a missed payment. In addition to hitting you with a late fee, they may also report to the credit bureaus that your payment is late.
By law, creditors can’t notify credit bureaus of a late payment until it’s 30 days past the due date. Paying the remainder of what you owe for that month prior to the 30-day mark can keep a late payment from showing up on a credit score, though you could still be liable for fees and penalties set by the creditor for making a late payment.
Because your payment history makes up 35% of your FICO® Score, having a late payment on your record can cause your score to drop.
Lenders consider a borrower’s repayment track record as a primary indicator of their ability to pay back future debt, which is why payment history is the largest component of most credit scores. Paying on time, all the time, can help build your credit score.
The impact of late and partial payments on your credit score will vary based on your existing credit history and how far behind you are on payments. Accounts that go unpaid for several months will do more harm to a credit score than a single late payment.
Over time, the impact of a late payment on your score will diminish and, after seven years, it will be removed from your credit report.
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Other Downsides of Making a Partial Payment
Falling short of what you owe can create other issues besides putting a dent in your credit score. Creditors may impose fees and take additional measures to secure repayment.
Here’s a closer look at what could happen if you only make partial payments on these common types of debt.
Auto Loans
What happens to your auto loan will depend on your agreement and history with the lender. If you’ve never missed a payment before, they may be willing to accept a partial payment for now.
Depending on the state, defaulting on your car loan can mean vehicle repossession, which can involve selling the car at public auction or electronic disabling the car to prevent it from being used. It can be a good idea to check the contract terms to learn what the lender is authorized to do and when.
Credit Cards
Unless you’ve come to a prior agreement with the credit card company, partial payments likely won’t satisfy your account’s minimum payment requirements. That’s not, unfortunately, how credit cards work.
Even if you pay something towards the bill, your account will likely still become delinquent, and the credit card company may report the late payments to the credit bureaus.
Failing to pay the minimum amount on a credit card bill also typically comes with late fees. Delaying payment further can result with additional consequences, such as freezing your credit card and sending your debt to a collection agency.
Mortgages
Making partial payments on a mortgage can be considered defaulting on the loan and even trigger the foreclosure process.
Prior to foreclosure, borrowers will likely incur late fees and receive a notice of default when the mortgage payment is a few months past due.
In general, a foreclosure can’t begin until 120 days after the first missed mortgage payment. That means you have some time to pay the amount that’s past due before the lender starts the foreclosure process.
Recommended: Prepayment Penalties: Why They Exist and How to Avoid Them
Student Loans
Getting out of student debt typically doesn’t involve partial payments. Paying less than the minimum due on student loans could cause them to become delinquent one day after the payment due date unless alternative arrangements are made with lenders.
With federal student loans, your loans typically enter default when you miss or only make partial payments for 270 days. The lender can then report the default to the credit bureaus. In addition, the government can garnish your wages, and even keep your tax refund.
A possible exception: If you have an income-driven federal student loan repayment plan, your monthly payment could be as low as $0 if your income dips low enough.
With private student loans, the rules will depend on the lender. If you remain delinquent for 90 days or more, the delinquency may be reported to the credit bureaus. If the account continues to be delinquent, you could fall into default, at which point private lenders can take legal action.
Alternatives to Making Partial Payments
Before making a partial payment, you may want to consider some alternatives:
Reaching Out to Your Creditor
It can be a good idea to contact the creditor or lender before the payment is due to explain your situation and what you can afford to pay that month.
You may also want to ask about a “hardship repayment plan.” This type of plan could potentially allow you the option of minimal or no payment, a temporary reduction or suspension in account interest, or interest-only payments.
You may want to keep in mind, however, that interest-only payments won’t decrease your principal — or the size of your loan. Some programs last a month, and others up to six months or so.
Contacting a Nonprofit Credit Counseling Agency
Nonprofit credit counseling agencies can help by negotiating lower interest rates with your current creditors. This can often result in lower monthly payments. If you are able to work out a plan, the payment you make may no longer be considered a “partial payment,” but instead an agreed-upon amount.
Considering Debt Consolidation
If you have multiple credit cards with high-interest rates and you’re having trouble paying the minimum on each, you may want to look into whether a debt consolidation program might help. The process involves taking out a personal loan at a bank or other reputable lender and then using it to pay off your credit cards.
You then end up with one loan to pay back, ideally at a lower interest rate. Typically, a closed-end loan like a personal loan means higher monthly payments, since personal loans have fixed terms. This is great news for borrowers who want to pay down their debt sooner, but it might not be the right choice for everyone.
Recommended: 6 Strategies for Becoming Debt Free
The Takeaway
If cash flow is tight, you might consider making a partial payment on a debt, hoping that paying something will prevent a late fee or a late payment from showing up on your credit report.
However, borrowers don’t typically get any extra credit for making a partial effort. If the monthly minimum or fixed payment hasn’t been paid in full, the lender will likely mark the payment as missed.
While partial payments may help chip away at your account balance, you can still end up facing fees, a reduced credit score, and potentially loan default.
If you’re unable to make full payments on your debt, it can be a good idea to contact your creditor as soon as possible and see if they may be able to offer alternative payment plans, forbearance, or postponement. Budgeting and tracking your spending can help you stay on track; many banks offer helpful tools for these tasks.
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