A default on your credit cards occurs when you fail to pay the minimum amount due for several months. In most cases, a default notice will be sent after six months of missed payments. Contrary to what many of us think, it takes more than missing a couple of payments.
How does credit card default happen?
Before your account goes into default, your credit card account will become delinquent. That happens if you have not made a payment for 30 days. If your card remains delinquent for six months, without even making minimum payments, then your credit card will go into default.
When you start to get delinquent on payments, you’ll be contacted by your lender to check what your situation is and how you plan to repay your balance. If your card issuer isn’t satisfied with your response, your account will be closed and the no-payment report will be sent to credit bureaus.
Leading up to a default, your late payments will also be reported to the credit bureaus. Whenever you fail to make payments on time, your credit score will be negatively affected.
Even if you try to build credit soon after a default, many lenders may not approve you for a new credit card or loan. They’ll want to see all your outstanding balances paid off or resolved as well as a fresh history of making on-time payments. Lenders are worried you’ll default on any new credit obligations, until you can prove otherwise.
How long does a credit card default stay on your credit report?
Getting a default status is bad both now and for years to come. It can affect your credit report for up to six years from the date of default. Even if the debt is paid, the evidence of default will still remain on your credit report for as long as six years.
With a default on your credit history, you can get blocked from getting a mortgage or a car loan and even from renting an apartment. Even if your finances are otherwise in good shape, a default can still prevent you from securing credit or a loan.
What are the consequences of credit card default?
A default is bad for any cardholder. It can affect various aspects of your financial situation, such as:
1. Account sent to collections
Credit card issuers can either close your account and transfer the debt to a collection agency, who may sue you. When this happens, you will no longer deal with the credit card company and instead deal with the collection agency. This can be very annoying, as you might have to deal with a barrage of calls from the collection agency and potentially face a lien on your paycheck.
2. Legal action
Some creditors are more aggressive. They may file for a local court judgment against you if they’re seeking an immediate resolution, which can lead to a paycheck lien, requiring your employer to send a portion of your income directly to your creditors.
3. Decrease on your credit score
A late payment is the biggest factor on your credit report. A failure to make timely payments for six months can lead to a drop on your credit score by hundreds of points, which can take up to years to recover.
4. Increase in interest rates
If you’re 60 days past due on a payment, your interest rate will probably go up drastically. Since you’re missing payments and continuing to carry a balance, your interest payments will only accrue too, making it all the more harder for you to repay the debts.
5. Decrease in credit limit
Defaulting on a credit card makes you look especially risky to creditors. They may lower their own risk by limiting the amount of credit to which you have access to. If you default on a credit card, you may see the credit limit decrease on your other cards. Lower credit limits invite more complications too, like increasing your credit utilization rate, which can impact your credit score.
How do I overcome a credit card default?
The best way to avoid a credit card default is to make payments on time or before the due date. But if the debt has already gone to collections, try negotiating a pay-for-delete agreement. You’ll pay off the debt with the collections agency in exchange for erasing the account from their reports. But it still requires you to have enough funds to pay off the outstanding debt.
If you need other options, consider these:
1. Settling the debts
Some creditors are open to negotiating a lower payment. However, most won’t be swayed by an offer that is less than 40% of the debt. A common settlement range is between 50% and 70% of your unpaid debt.
2. File for bankruptcy
If a settlement is still too high, you might want to file for bankruptcy. However, keep in mind that a bankruptcy clings to your credit score for a period between 7 to 10 years.
3. Do nothing
You can always choose to ignore the account. But creditors can still pursue it – and sue you – as long as the statute of limitations is still in effect.
Getting into a financial mess is never a good thing, even if it can’t be helped. But have a clear understanding of the impact of late payments. Lastly, if you’re struggling with your credit card bills, talking to your creditor early can help you avoid getting a default notice.