Credit card default: What it is and how to deal with it

Credit card default might sound concerning, but it's a situation many people navigate successfully. What really happens when payments are missed, and how can it affect your financial health?

This article sheds light on the realities of credit card default, from the immediate effects to the long-term implications. More importantly, we'll explore practical strategies for managing these challenges and steering back toward financial stability.

What happens if you default on a credit card?

Defaulting on a credit card can lead to late fees, increased interest rates, a significant drop in credit score, collection actions, and potential legal consequences.

Defaulting on a credit card can have several significant immediate and long-term consequences.

Late fees and penalty interest rates

Credit card companies usually charge a late fee if you miss a payment. Additionally, if your payment is late by 60 days or more, they might increase your interest rate to a higher penalty rate.

Credit score impact and long-term effects

Your payment history is a critical factor in your credit score. Missing credit card payments can lead to a significant drop in your credit score. This impact can last for years, as late payments remain on your credit report for up to seven years.

Increased debt

The balance on your credit card will continue to grow due to ongoing interest charges and possible late fees. This can make it even harder to pay off your debt.

Other consequences of credit card default:

Difficulty Obtaining Future Credit: With a lower credit score and a default history, you may find it more challenging to obtain new credit. If you can get approved for new credit, it may come with higher interest rates and less favorable terms.

Stress and Anxiety: Dealing with debt collectors and facing financial uncertainty can be highly stressful and can impact your mental and emotional well-being.

Impact on Co-signers or Joint Account Holders: If your credit card has a co-borrower or is a joint account, the default will also affect the other individual. Their credit score could be damaged, and they may be pursued for the debt.

It's important to contact your credit card issuer as soon as you realize you might have trouble making payments. Many issuers offer hardship programs or can work with you to set up a payment plan. Taking action early can help mitigate some negative consequences of defaulting on a credit card.

Navigating the credit card default process

From missed payments to charge-off: The timeline

Suppose you fail to pay your credit card bills on time. In that case, the lenders will likely inform the three major American consumer credit bureaus—Experian, Equifax, and TransUnion—of your late payments.

After receiving no payment for 6–8 months, the creditors will be required to "charge off" the debts. That accounting term means the lender must remove the debt from their "accounts receivable" books. A charge-off does not mean that you are not liable for the debt.

Charge-offs will appear as derogatory items on your credit reports and will likely cause a significant reduction in your credit score.

Dealing with collections and legal actions

Collections

If you default on your credit card, you'll likely receive direct collection calls and letters from the creditor. If you cannot pay the debt after several months, the creditor will likely refer the account to a third-party collection agency.

Third-party collectors are known to be much more aggressive in their collection tactics than original creditors. So, don't be surprised if the calls become more persistent or even threatening.

The Fair Debt Collections Practices Act requires third-party debt collectors to stop calling you if you send a written demand to cease communication.

Judgments

If a creditor can't get money from a credit card user, they might sue to get it. While only a small percentage of delinquent accounts end up in litigation, it is a possibility about which you should be aware. If one of your creditors sues you, the court will likely issue a judgment in the creditor's favor.

Depending on your state's laws regarding the enforcement of judgments, the creditor may be able to garnish your wages, levy your bank accounts, or take other action to enforce its judgment.

If a creditor files a lawsuit against you, you may need to consider establishing a repayment plan. Consider a debt relief program, such as credit counseling, debt settlement, or even filing for bankruptcy.

Can you rebuild credit after a credit card default?

Yes, it's possible to rebuild credit. Late payments, judgments, and bankruptcy will hurt your credit. Credit scoring models and lenders give less weight to older negative items in a consumer's credit history as time passes. They focus more on newer positive trade lines.

Steps to Improve Your Credit Score

You need new credit lines to establish a positive payment history to rebuild your credit. Establishing a positive payment history can be difficult for people with past credit problems. This is especially true for those who filed for bankruptcy or went through a debt settlement program.

Utilizing Secured Credit Cards and Co-signers

Here are two possible solutions to pursue to improve your credit:

1. Co-signer: If you know someone with an established credit history who will co-sign a loan with you, you may be able to obtain a loan and start building your credit.
2. Secured credit card: if you cannot find someone to co-sign an unsecured loan, apply for a secured credit card.

Secured credit cards require you to deposit cash in an account with the credit card issuer. The credit line on the card equals the amount of money on deposit. This may sound strange; why not just spend your own cash? Secured credit cards report timely payments to the credit bureaus, which helps establish a positive credit history.

Bills Action Plan - Dealing with Credit Card Default

Here are four essential steps to guide you to deal with a credit card default:

1. Open Communication with Creditors: Reach out to your creditors to discuss your situation. Many are willing to negotiate payment plans or offer hardship programs.
2. Develop a Realistic Budget: Create a budget prioritizing essential expenses and debt repayment. This will help you manage your finances more effectively and avoid future defaults. Check out the MOLO app for budgeting.
3. Explore Debt Relief Strategies: Investigate options like debt consolidation, credit counseling, or debt settlement to find a solution that fits your financial situation.
4. Rebuild Your Credit: Start small with secured credit cards or loans with a co-signer to gradually improve your credit score.

Remember, the key to overcoming credit card default is taking proactive steps and staying committed to your financial recovery plan. You can work towards a healthier financial future with determination and the right strategies.