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What Happens When You Don’t Pay Your Credit Cards?
By Kristopher Kane MONEY RESEARCH COLLECTIVE
There are many reasons why someone might not pay their credit card bill. Some of the most common include financial hardship caused by unexpected bills, job loss or overspending. Other things that could happen include the cardholder not understanding the card’s terms, forgetting to make payments on new credit cards or simply not having enough money to pay the minimum monthly payments.
Whatever the reason, if you’re considering not paying your credit card, it’s important to know that you may face severe consequences. Even if you accidentally miss a payment, it can have financial repercussions and damage your credit score for years. Not only can it make it difficult to get approved for housing or a loan, but you may also face late fees, interest increases and legal actions from the card issuers.
The following information provides insight into the potential aftermath of not paying credit cards, including how to avoid late payments and get back on track.
If you don’t pay your credit cards, what happens?
There are several potential outcomes to not paying your credit card bill, some severe. A missed credit card payment doesn’t just appear on your payment history but also on your credit report.
Penalties for missing a payment include negative marks on your credit history, late fees, the loss of promotional interest rates or rewards and increased interest rates. Even a recently missed payment on credit card debt can result in a call from a collections agency. And, the longer you go without making a payment, the worse the effect on your credit.
30 days late
Even a single missed credit card payment can result in significant consequences. Here’s what can happen if your bill is 30 days past due.
You may have to pay late fees
You’ll likely incur a late fee if you miss a credit card payment for over 30 days. The fee amount may vary depending on the credit card issuer’s terms and conditions, but it’s typically a percentage of the total balance.
You’ll be negatively reported to credit bureaus
Additionally, your credit issuer will report missed payments to the credit bureaus, which will appear negatively on your credit report. This will significantly lower your credit score, making it more challenging to get approved for loans and other forms of credit.
If your credit card had a promotional annual percentage rate (APR), you might lose that after one missed payment.
60 to 180 days or more late
Missing multiple payments is considerably more severe. Your creditor could charge off your account, and you could even face a lawsuit.
Your creditor may close your account
Typically, after six months, an unpaid account is considered in default, meaning the credit card company has the right to close the account. Though they may reach out before taking this step, they are not obligated to. In fact, many card issuers close accounts without notification in the event of serious nonpayment, as closing delinquent accounts helps protect the company from further financial losses.
The creditor can charge off your account, meaning they write it off as a loss for tax purposes, but you’re still responsible for paying the debt. While they typically remain on your credit report for seven years, you may be able to remove charge-offs from your credit report early.
Your creditor will send your unpaid debt to a collection agency
If you can’t pay credit card debt after several months, you may find your credit card canceled due to nonpayment, and the creditor may send your account to a collection agency.
You may face additional fees and receive repeated phone calls and other attempts at contact by the collections agency. Ultimately, failing to pay your credit card debt can result in a lawsuit and a judgment against you.
Your creditor may enforce a penalty APR
If you miss multiple payments, your credit card issuer may increase your interest rates across the entire balance you owe. If you have more than one credit card with the same bank, you might see your interest rates rise on those additional accounts — even if they are up-to-date.
This practice, known as a penalty APR, can significantly increase the amount of money you owe, potentially representing thousands of dollars of interest and fees across the life of a debt.
If you fail to pay at all
Suppose you can’t pay credit card debt at all. In that case, you will incur compounded late fees. Your credit score will be negatively affected as in the above scenarios, but the repercussions will grow more serious.
Rather than sending the debt to collections, the credit card issuer may take legal action against you by filing a lawsuit. By suing you for the debt, they will ask a judge to require you to appear in court, and the creditor will seek a court injunction or judgment against you.
This court judgment may allow your creditors to take further legal action. Depending on the severity of the situation, creditors could garnish your wages, seize your assets or place a lien on your property.
It’s also important to note that nonpayment of credit card debt can remain on your credit report for up to seven years.
What you can do to avoid late payments
You can do several things to avoid late payments and any adverse effects that result. Consider the following strategies.
- Set up automatic payments: Most credit card issuers offer the option of automatically deducting payments from a checking or savings account on or before the due date of your minimum monthly payment. This enables you to ensure your payments are always made on time.
- Pay more than the minimum due: It’s not uncommon to pay more in interest than toward the principal of a credit card debt each month. Paying more than the minimum due will reduce the interest you pay over the debt’s life and help you avoid late payments.
- Set reminders: Most credit card companies have mobile apps that offer payment reminder notifications. Setting up these regular reminders for several days before, the day of, and the evening of a due date can help ensure you never miss a payment.
- Ask for an extension: If you know you can’t make a payment on time, contact your credit card company and ask for an extension. In most cases, they’ll be happy to work with you to avoid having a late payment show up on your account — or your credit history.
- Use balance transfer offers: Many banks offer balance transfers to customers with good credit scores. Balance transfers frequently provide a way to consolidate credit card debt at a lower interest rate for a promotional period. This can give you a little breathing room, and the lower interest rate will make it easier to pay off your balance in full.
Make at least the minimum payments on credit card bills
When you have credit card debt, you must pay a minimum amount each month. Your minimum payment fluctuates based on your balance and accrued interest and fees.
Making at least the minimum payments on credit card bills is incredibly important. Not only does it help you stay on top of your finances, but it’s also the first step in responsible credit repair. It helps maintain a good credit score, opening up opportunities for you.
When you don’t miss any payments, you show lenders you’re responsible and can handle your debts. This is a crucial factor that contributes to your credit score and can help you access better loan rates, increased credit lines and more.
Paying your minimum bill is also an excellent way to manage your overall debt. By making regular payments, you avoid the added expense of late fees and higher interest and keep your credit score in good standing. This can help preserve your current interest rate and give you access to a higher credit limit.
However, if you want your payment to make a larger impact, pay more than just the minimum due. This can significantly help you get out of debt faster by reducing what you owe and the interest you will pay. It also helps increase your credit score and improve your credit utilization ratio (the percentage of the available credit you are using).
Don’t avoid speaking to debt collectors
You shouldn’t hesitate to speak to bill or debt collectors if you cannot pay credit card debt. Due to your unpaid debts, they have a legal right to contact you and attempt to recover information that could help secure payment.
It’s important to speak to them if you become ill, lose your job or otherwise cannot pay credit cards issued by the bank they’re representing. In most cases, they’ll work with you to establish a payment plan or to find other options to resolve your debt.
Make sure you know how to deal with debt collectors. If you ignore them, they may pursue legal action just like a credit card company, including filing a lawsuit to seize your property or garnish your wages.
Keep your credit score in good standing with smart financial moves
Maintaining a good credit score is an essential part of managing your finances. A good credit score will make getting approval for loans and credit cards more accessible and will typically guarantee better interest rates. It’s important to take an active approach to ensure your financial health.
First, always make sure you pay your bills on time. Late payments can harm your credit score, so setting up reminders or automatic payments is essential to ensure you’re making timely payments. It’s best to pay off any outstanding debts as soon as possible. High credit utilization can also lead to a lower credit score, so paying down debt is vital in keeping your credit utilization ratio low.
Another thing to consider is checking your credit report regularly. You’re entitled to a free credit report each year, so take advantage of this. This can help you spot any errors or discrepancies impacting your credit score. Make sure to dispute credit report errors you find right away so they can be corrected.
Finally, it’s important to be mindful of taking on too much debt. Taking on more debt than you can comfortably manage can lead to missed payments and a lower credit score. Avoid taking on too much debt and only use credit when you can comfortably pay it off.
Overall, maintaining a good credit score is essential for managing your finances. By following these smart financial moves, you can ensure your credit score stays in good standing. Though it can be challenging to always make credit card payments on time, it should be something you always strive for. Doing so can help you enjoy the benefits of good credit for years to come. If you are going to miss a payment, contact your bank as soon as possible.