What Will Happen If I Default on My Credit Cards?
Deciding to stop making payments can have serious consequences
Everything goes downhill from the day you stop paying your credit card. You may feel relief when you don't have to come up with your payments every month, and innocently think there are no consequences, but your credit card issuer quickly takes action on your missed payments. The effects of missed payments are small at first, but increase as more time passes.
If you’re finding it difficult to manage credit card payments and debt amid the COVID-19 crisis, here are some relief options from credit card issuers that you may have.
Late Fees and Interest Accumulate
When you stop paying your credit card bills, late fees are added to your credit card account. Plus, your minimum monthly payment increases because you have to make up the payments you've missed, and pay the late fee. Most damaging, your interest rate will increase to the higher penalty rate after your account becomes 60 days past due—which is two missed payments. And, of course, each month your minimum payment will get larger as more late-payment fees are added to your balance.
When the penalty rate kicks in, your finance charges will also increase. The result is that your outstanding balance (and the payment you need to catch up on) gets larger every month you're late. It becomes increasingly difficult to catch up the more behind you are.
A Lasting Effect
Even after you catch up, the penalty rate will remain in effect until you've made six consecutive payments on time. After that, the interest rate must go down for your existing balance but the penalty rate can remain in effect for new purchases.
Collection Efforts Increase
Your credit card company's billing department will begin to contact you by phone, mail, text message, or email to remind you of your credit card payments. Unfortunately, you can't stop calls from your credit card company the way you can with a debt collector. When you want to stop debt collection calls, the Fair Debt Collection Practices Act allows you to send a written cease-and-desist letter telling it you don't want to be contacted anymore. However, the same law doesn't apply to your original creditor.
When you're only a few days or weeks behind on your payments, calls from your creditor aren't frequent. In this instance, they're gentle reminders to become current on your account. However, the further behind you get, the more frequently you'll be contacted. Not only that, the payment reminders get harsher in tone and start mentioning serious actions like charge-off and default. Your creditor may eventually send you a settlement offer, which will let you off the hook for the debt if you pay a percentage of your outstanding balance in a lump-sum payment.
Credit Report and Credit Score Impact
Late payments are added to your credit report as you become 30, 60, 90, 120, and 180 days late. Unfortunately, these late payments will make your credit score decrease and could ruin your ability to get a new credit card or future loan. Your insurance rate could also increase as a result of credit card delinquencies.
Six months (or 180 days) after you stop making your credit card payments, your account will be charged off. In this case, the credit card company writes off your unpaid debt as a business loss.
While you no longer owe money, you get a serious blemish on your credit report that will stay there for the next seven years, alerting everyone that you once defaulted on a credit obligation.
Your Account May Go to a Collection Agency
Charge-off accounts are usually sent to a collection agency. From there, they are moved from one collection agency to another until they are paid (or discharged) in bankruptcy. Your original creditor (or a third-party debt collector) can sue you for the debt until it's paid or settled in bankruptcy. After a certain amount of time, the statute of limitations can protect you from a lawsuit judgment, but the account must be completely inactive for several years—and the burden of proof will be on you.
Credit Card Hardship Options
If at all possible, try to salvage your account and protect your credit. If you can't afford your credit card payments, consider contacting a consumer credit counseling agency that can help you explore your options. Your credit card statements include the number of a credit counseling agency.
Credit Karma. "What Is a Penalty APR and Why Should You Care?" Accessed May 20, 2020.
Discover. "What Does It Mean When My Credit Card Is Past Due?" Accessed May 20, 2020.
Federal Reserve. "Fair Debt Collection Practices Act," Page 1. Accessed May 20, 2020.
FTC. "Settling Credit Card Debt." Accessed May 20, 2020.
Experian. "When Do Late Payments Get Reported?" Accessed May 20, 2020.
Insurance Information Institute. "It’s All about the Numbers: Why Credit Is Important—To Your Insurance, and Your Life" Accessed May 20, 2020.
Experian. "What Is a Charge-Off?" Accessed May 20, 2020.
FTC. "Time-Barred Debts." Accessed May 20, 2020.