The most prudent thing to do is always to pay off your credit card bills, ideally the full balance, so that you don’t pay higher interest charges. The next best thing is to pay the minimum credit card payment on time. But sometimes things don’t go as planned, and people miss credit card payments. So, what happens if you stop making payments on your credit cards?
As you can imagine, credit card issuers have established procedures for handling accounts that are delinquent. You will face penalties and fees, which can impact your credit score. If you're experiencing financial difficulties, the best thing to do is to be proactive and call your credit card issuer to explain your circumstances.
Let’s examine the timeline that affects your credit and how you can make the best decisions for your case, even if you face financial hardship.
A missing payment triggers a late fee and applies a penalty rate on your credit card interest. Most credit card issuers charge a late fee after your payment is about 1-5 days past the due date. These fees usually range from $25 to $40 per missed payment. Additionally, your interest rate may jump to the penalty annual percentage rate (APR), which may be as high as 29.99%; this means your bad credit will grow even faster. If you have a promotional interest rate, it can significantly impact your debt.
After 30 days without paying your credit card, your credit card company will report the delinquency to the major credit bureaus. This negative mark on your credit report begins to impact your credit score. The impact can be significant, potentially dropping your score by 50-100 points or more, depending on your previous credit history.
If you go 60-90 days without making a credit card cash payment, your card company may suspend your charging privileges and prevent you from making new purchases. They may also add late fees each month, which can compound your debt problem. During this period, you will receive increasingly urgent communications from debt collection agencies trying to collect payment. Be aware of the statute of limitations, which determines how long a creditor or debt collector can legally sue you to collect the debt.
If you fail to pay after 120-180 days, your account will typically be charged off. Your debt doesn't disappear; the credit card company writes it off as a loss for accounting purposes. The charge-off status appears on your credit report, which can severely damage your credit score. At this point, your account is usually transferred to an internal collections department or sold to a third-party debt collection agency.
When you miss payments, the effect on your interest rates can be dramatic and long-lasting. Most credit card agreements include terms that allow the issuer to impose a penalty APR if you are late with payments. This penalty APR might range from 24.99% to 29.99%, significantly higher than standard interest rates.
Many cardholders don't realize this penalty rate can apply to their existing balance and new purchases. Their debt grows rapidly, and it is even harder to catch up and pay it in full.
The increased APR creates a troubling cycle. Your monthly minimum payment increases, and it will be even harder if you struggle to pay your credit card payments. You will likely miss more payments and have deeper financial trouble.
Some issuers may even raise your APR on other cards you have with them, even if those accounts are current, under what's known as "universal default" clauses.
Missed credit card payments can damage your credit score. Payment history accounts for approximately 35% of your FICO score calculation, making it the most essential factor.
A single 30-day late payment can lower good credit scores by several points. After 60 days, your score may drop by additional points, which will drop further with every missed payment.
Different aspects of delinquency affect your score in various ways.
The recency of the late payment impacts your score more heavily, as more recent delinquencies hurt more than older ones.
The severity of delinquency also matters, with 90 days late being worse than 30 days late.
The frequency of late payments plays a role, too, as multiple delinquencies hurt more than isolated incidents.
Additionally, the number of accounts with late payments factors into your overall score reduction. The more accounts that go unpaid, the heavier the impact.
If you're struggling to make credit card payments, there are options available that are better than simply stopping payments.
The first thing is to be open and honest about your financial problems.
Many issuers offer hardship programs for customers experiencing temporary financial difficulties. These programs may include temporary reductions in interest rates, waived late fees, lower minimum payment requirements, and limited-time payment deferrals. Card issuers appreciate a customer calling them beforehand, showing determination and responsibility.
Some issuers may even offer potential debt settlement for significantly less than you owe. Contacting your issuer before falling behind is essential, as these options may be more limited once you are already delinquent.
Credit counseling agencies can establish debt management plans (DMPs) where they negotiate with creditors on your behalf. A debt management plan can reduce or eliminate interest rates, waive late fees, and create a single, manageable monthly payment. They generally allow you to pay off debt in 3-5 years and have minimal impact on your credit score compared to default.
If you still have decent credit, consider transferring high-interest balances to a 0% intro APR card. Another option is to plan to get a personal loan at a lower interest rate to pay off credit cards. Some homeowners might consider using a home equity loan, though this puts their homes at risk if they default.
If you cannot make full payments, make at least the minimum to keep your account current and prevent the worst credit damage. While not ideal in the long term due to interest costs, it buys you time to improve your financial situation.
For overwhelming debt with no realistic path to repayment, bankruptcy may be appropriate. Chapter 7 can discharge most credit card debt, but has severe credit consequences. Chapter 13 creates a 3-5 year repayment plan with potentially reduced balances. Both options stop collection activities and lawsuits.
If you must choose between bills, prioritize housing payments like rent or mortgage, utilities, food and medicine, and transportation needed for work. Credit cards and other unsecured debts should be last on your priority list if resources are severely limited.
Once you have addressed any immediate payment issues, create a realistic budget that includes all your income and expenses.
Also, work on building an emergency fund to prevent future payment problems. Most credit card balances balloon when people use them for emergency expenses, such as car or home repairs, or to pay a medical bill.
At the same time, consider looking for additional income sources to improve your finances and give yourself some breathing space. You can direct more income toward credit card payments and building an emergency fund.
Finally, monitor your credit report and dispute any inaccuracies you find. Once you have resolved credit card delinquencies, consider secured credit cards to rebuild credit.
Be honest when you assess your finances and realize that you can’t pay your credit cards. Don’t ignore any communication from your card issuer, and be proactive. It shows that you are a responsible adult and take your finances seriously. Creditors will be more willing to negotiate and find a solution if they trust you. Don’t let credit problems escalate because your creditors will interpret this negatively.
Look for professional financial counseling from non-profit organizations that can provide personalized financial education and help you adjust your income and expenses while still paying off your credit cards.
Many people have had difficulties with their credit card payments. As long as you acknowledge the problem and are open, there are always solutions.
If you still have questions about your credit card payments, call us today to learn how we can help. ClearOne has helped thousands of people get out of debt in a streamlined and organized way. We can implement a plan that works for you, too!