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If you break the terms of your loan in any way, that is a “breach of contract.” Failure on your part to make loan payments on time entitles the creditor to take legal action against you. The legal remedies that can be applied by a judge range from garnishing your wages, to seizing your personal property and selling it at public auction to raise the money you owe to sentencing you to prison. In addition, you may be sued for damages caused to the creditor or his business by your failure to repay on time.

But, you may ask, couldn’t the creditor’s legal fees easily add up so that they’d eventually be much more than the amount you owe? The answer is yes, they could. But that’s no reason to be non-complacent. There are several reasons why:

• Your case may be referred to collection agencies, which employ legal but irritating means to encourage you to pay
• The creditor can always sue you in small claims court, which is a much more affordable venue
• Banks and other major financial institutions contract with law firms and provide them with monthly retainers that cover whatever cases have to be addressed, so the costs of yours would be included in that fee
• Your non-payment will be reported to credit bureaus

If the prospect of being brought to court − and losing, since your signature on a loan agreement usually means these are open and shut cases – is not daunting enough, consider what the effect would be if you damage your credit score.

There are three major credit bureaus (also known as consumer reporting agencies) active in the U.S. They collect payment information on every consumer in the country who is legally obliged to pay a bill. They will probably be informed of your non-payment by the creditor, but if not, they have other means to stumble upon it. When that happens it remains a part of your credit history for as long as seven years.

The credit bureaus make their money by selling their credit reports to parties that need to consult them to conduct their business, like banks, savings and loans, credit unions, mortgage companies, credit card companies, and anyone else with whom you might enter into a contract that requires regular payments, even a potential landlord. An integral element in that report is your credit score, which is a risk assessment based on a sophisticated algorithm, of the likelihood you will repay any credit you might be given in the future.

Keep in mind that for the credit bureaus, a non-payment is a non-payment. It doesn’t matter how large or small the payment was. All debts that are unpaid will damage to your credit score. And the lower your credit score, the harder it will be to be approved for any credit anywhere.

Any and all late payments you might make will also appear on your credit report, with a notation that they were made either 30, 60, 90, or 120 or more days after the due date. Each ascending time period will cause an ascending level of damage to your credit score. Recent late payments will always cause greater damage than previous ones, since they gradually recede into your credit history before being removed.

The bottom line is pay your bills on time. You’ll hurt yourself if you don’t.