Credit cards are incredibly useful, but it is common to carry a balance. But what happens if you don't pay your credit card?
The consequences depend on how late you are, how many payments you miss, and your credit card issuer. You are likely to have late fees, an increase in your interest rate, and a drop in your credit score. Missing too many payments drops your credit score even more and can send your debt to collections.
Explore what happens when you don't pay your credit card bill in more detail.
What Happens If You Don't Pay Your Credit Card Bill?
When you miss your credit card payment, you can expect late fees to be added on as well as a jump in the interest rate you pay. You will also see damage to your credit score. With continued missed payments, your card may be frozen, and your debt will likely be sold to collection agencies. You can also end up sued and have your wages garnished.
When you have missed a payment, you will get a late payment charge that can be as much as $40. For any subsequent payments missed in the next six months, you will also have a late fee of up to $40. This will be added to the balance on your card, and you will also have interest accumulated on it depending on your APR. There are some cards that will waive late fees on the first violation if you contact them and give the reason you failed to pay on time.
This is in addition to the interest on any purchases made for that billing cycle. This is what happens when you carry the balance forward or do not pay the full payment owed.
Take a closer look at what happens in various situations and get answers to your other questions about not paying your credit card bill.
Missing One or Two Payments
When you have just missed a payment or two, you will still have some consequences to deal with. You will have late fees and will lose your APR that was introductory. You may also incur a penalty APR. On top of that, you will suffer a damaged credit score.
Changes to Your APR
While having your introductory APR revoked may not seem like a big deal, this can cost you quite a bit. Going from a 0% fee to a 15% fee or even 29.99% adds up quickly. The CARD Act, or Credit Card Accountability Responsibility and Disclosure, states that card issuers can't charge a higher APR on future items bought without a 45-day notification of the change. This is EXCEPT when APR increases because of missed payments.
For those that end up with a penalty APR, this Act states the issuer must review the account every six months for eligibility for a lower rate or the original APR. But that will not help you in the intervening six months.
It is important to remember that just one payment can cause APRs to skyrocket. There is a chance that penalty APRS will return when certain requirements are met.
A Drop in Credit Score (If Reported)
With a missed payment, the account may be reported as delinquent. This means you failed to make the minimum monthly payment. This report can damage your credit score.
Some issuers don't report on one late payment. But anything reported will stay with the credit report for seven years. When you fail to make payments, it increases the likelihood of being reported.
Ask Your Credit Card Issuer to Waive Fees
For those who have always been good customers, it is worth a phone call to the issuer. If you can explain what happened, you may ask that the late fee be removed. In these cases, the credit card company would rather you be happy and return to good standing than have fees.
Your Issuer May Have a Grace Period
You should also remember that many issuers have a 30-day grace window. This means you don't get charged interest on charges when minimum payments are met on time. If a payment is missed by just a day, the grace period ends, and interest is owed for all 30 days.
Three Payments Missed
When you have missed three payments, you will see an increase in the damage to your credit score. You will also have more late fees.
Most cards will close your credit account after three missed payments.
If the payment is missed three times in a row, you may end up with over $100 in fines. This is in addition to the accumulated interest. You will likely be reported and see your credit score affected.
You will also most likely be contacted by the issuer's internal collection agency. You may get a negotiated payment plan that lowers payments. Your account may be closed or prohibited from new purchases. Your utilization rate will be affected, further damaging your credit score.
More Than Three Missed Payments
When you have more than three missed payments, you still have the late fees, but you will also have your debt sold to a professional collection agency.
In addition, you will have sizeable damage to your credit history, and you may even incur a lawsuit in an effort to recover the debt.
Your Debt May Go to a Collection Agency
More than three missed payments may have your debt charged off and then sold to a credit collector. This is because the issuer does not feel you will pay the debt back. It is generally sold at a loss to a collector, who also settles for less than what is owed to close the debt down.
Even though it is sold for less than owed, the collections agency is entitled to the full amount. When sold, the account is reported as a collection. This damages your score and sticks around for seven years. Agencies will make their attempts to collect on the debt more aggressive, but they are still regulated on what they can do.
You Must Pay Taxes on Canceled Debt
When more than $600 is canceled, you need to pay taxes on it, and the IRS will require your collector to file a 1099c form. When a debt is canceled, the IRS views it as income for tax purposes.
How Long Can You Go without Paying a Credit Card Bill?
The amount of time you can go without paying a credit card bill depends on the severity of consequences that you are willing to deal with.
If you don't want any late fees or an increase in your interest rate, you must pay by the end of your card issuer's grace period.
If you don't want the debt to go to collections, you must pay it off within three months, at the most.
The latest that you can pay off your credit card is 180 days. If your card account is past due by more than 180 days, the issuer must legally charge off your account. When your account is charged-off, this means that your account gets closed, and the issuer writes it off in the form of a loss. Importantly, you will still have to pay the debt. The card issuer's legal department may collect it, or they may sell it to a debt collection agency.
Remember that charge-offs negatively impact your credit score and stay on your report for seven years.
What If You Never Pay Off Your Credit Card?
If you fail to pay your debt collectors, they may take whatever legal action is necessary to collect from you. This may mean taking you to court to get you to pay.
If you haven't paid, then your collection agency may file a lawsuit or judgment against you in an attempt to collect on the debt. If you have a judgment filed against you, it's best to answer the summons.
Is Defaulting on a Credit Card a Crime?
It is not a criminal act to default on your credit card. However, you should remember that the debt collectors can bring you to civil court.
If a judgment is made in their favor, you will owe them the balance of the debt. If you cannot pay it outright, your wages can be garnished until you pay it off.
Similar post: Can Debt Collectors Take Your Stimulus Check? [ANSWERED]
You May Need to Declare Bankruptcy
Bankruptcy may be one solution if a judge rules you have to pay the credit card debt, but you can't afford to. This would be the only way to stop the government from garnishing your wages to pay the debt. It also forces the debt collectors to stop most of their collection efforts. But this is a very serious financial decision, so you don't want to make it lightly.
Also Read: Six Tips for Paying Off Your Debts Quickly
Chapter 13 Bankruptcy
If you can, you should try to file for Chapter 13 bankruptcy. This requires you to have a regular income, but it can let you keep your valuable items, such as your house or car. This type of bankruptcy will require you to create a three- to five-year plan to repay the debt. You will pay a third-party trustee who pays the debt collectors.
This will appear on your credit report for 10 years.
Chapter 7 Bankruptcy
Otherwise, Chapter 7 bankruptcy is an option. With this, a third-party trustee will liquidate any assets that aren't exempt from paying the debts. This could mean losing valuable possessions, including your car and house.
This will remain on your credit report for seven years.
If you miss a single credit card payment, you will likely have late fees and may have a higher interest rate. Once you miss a few payments, your credit card account may be closed. Any missed payments can hurt your credit score, and the effects increase the later the payment. If you miss over three months of payments, you may face a collection agency and lawsuit. Minimize issues by talking to your card issuer to work out a payment plan if possible.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.