When you fail to pay a credit card bill, your card may enter into default, significantly damaging your credit score and limiting your access to new cards and credit.
Missing a couple of payments isn’t the same as defaulting. Instead, a default usually occurs when you fail to pay the minimum amount due for a few months. In most cases, you’ll receive a default notice after missing payments for six months.
A credit card default notice is a letter from your card issuer that says that your account has unpaid bills and is going to default. The notice typically gives you a couple of weeks to pay off missed payments or face losing your account.
This type of notice can be recorded in your credit report, dinging your credit score and making it harder to get a new card or a personal loan or even open a bank account in the future.
A default is bad news for anybody. If you have a default on a credit card, a different scenarios could unfold, depending on the amount of your debt and the policies of the lender. Here are the most likely outcomes:
1. Decrease in credit score
A default is reported to the major credit bureaus and typically affects your credit score significantly. You could lose hundreds of points on your score.
2. Increase in interest rates
After you're 60 days past due on your payments, your interest rates can rise significantly, making it harder to pay off your debt.
3. Decrease in credit limit
Creditors view a default as irresponsible and may want to limit their own risk by restricting the amount of money available to you. You’ll likely see fewer credit card offers, probably with lower credit limits.
When you receive a default notice, your creditor will ask you to pay the full amount of your debt. You can offer to make monthly payments at a rate you can afford, but it is unlikely your creditor will agree.
If you can’t pay in full or find a compromise payment plan, your account will be closed and, after 180 days, will be reported to credit bureaus. After the account is defaulted, your credit card issuer has the right to take these actions against you:
1. Passing the debt to a collection agency.
2. Taking legal action, suing you for repayment.
3. Docking your salary, if the court finds you responsible for the debt, taking regular payments directly from your paycheck.
There are few options for dealing with a credit card default:
1. Pay the amount in full
If you have the money, you can choose to pay the amount owed in full. Try negotiating with your credit card issuer, asking if they’ll remove your default from the credit report in exchange for a payment. It's worth a shot.
2. Arrange a debt agreement
Negotiate with your credit card issuer to reduce the debt owed by you In most cases it is not agreed upon, but some issuers can be persuaded by coming to a settlement.
3. Declare bankruptcy
Depending on the extent of your debts and the complexity of the situation, bankruptcy can either reduce or clear the debt on your defaulted card. Keep in mind that a bankruptcy stays on your credit report for 7 to 10 years.
If you're worried about missing payments, we're here to help. Bright is an easy and smart way to manage your credit cards.
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If you don't have it yet, download the Bright app on the App Store or Google Play. Connect your checking account and credit cards, set a few goals and let Bright get to work!
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With a postgraduate degree in commerce from The University of Sydney, Pranay has his finger on the pulse of the finance industry. Breaking down complex financial concepts is his forte.