Default on credit card dues leads to a drastic fall in all aspects of a person’s life. The financial burden will go up with rapid progression, the credit score will get hampered, and even social life can disrupt. It may seem okay to skip a payment or two on credit card dues, but it has a more prolonged impact on the financial situation.
What happens if you don’t pay your credit card bill?
The study has researched and analyzed the impact on credit rating of a credit card holder if someone does not pay on a regular basis. We have listed the top impacts below.
Accumulation of late fees and interest on the due amount
When a cardholder spends with his credit card, he should keep track of the expenses. Because these expenses won’t vanish in the air. These will have to be repaid. If he fails to pay the credit card’s outstanding bill within the due date, the issuer bank will charge him with late payment fees and impose interest at APR on the outstanding balance.
If the cardholder still keeps failing to pay his bills, more interest will be imposed on the due amount, and this will be accumulated. Also, banks will charge higher late payment fees for a further period of default. The total outstanding will increase slowly at first but rapidly later on if payment failure keeps continuing.
Moreover, when the payment is past due for over sixty days, banks start to charge additional interest over the usual APR as a penalty. But paying the minimum expected in each billing cycle can avoid this penal interest.
Long effect of high APR on credit cards
After experiencing a distress situation from credit card payment default when the cardholder starts to catch up with his dues, his cards still may remain under the effect of penal interest charges. Sometimes this can continue until the defaulter clears his payments for six consecutive months. Some banks urge this to get confirmation of the cardholder’s commitment to pay dues regularly in the future.
If a person has more than one credit card with the same bank, then failing on one card’s bill can impact with higher APR, including penalty on other cards. This high-interest rate will be applicable to the existing balance on the card as well as to any new purchases with the card. The aging of the transaction will bear no significance herein, and interest will be charged at a flat rate on the total amount.
However, APR will slow down after making some consecutive regular payments, and the regular features will get back to all of the credit cards.
Disruption of social life with increasing effort for debt collection
When payment remains off to a card, the card-issuing bank’s billing department starts contacting the cardholder with the purpose of debt recovery. The bank may contact by calling or messaging on formal occasions. With the passage of time, the frequency of the contact increases and become more formal. The reminders are communicated through emails or formal letters and being sent to the debtor’s residence or workplace.
On a more serious note, the efforts become aggressive. The bank sends representatives to visit the cardholder for their money. And to be honest, these attempts are not often sweet. Instead, these can disrupt one’s social life and damage his reputation.
Unlike the debt collectors in case of other sorts of debts, one can’t stop their bank from attempting these efforts. Though the Fair Debt Collection Practices Act allows blocking the debt collection calls in other credit cases, it doesn’t stop banks from making their credit card debt recovery attempts.
Impact on credit score and credit report
Default on credit card dues will make a downfall in the credit score. With the lapse of time credit score of a particular borrower will decrease eventually. A low credit score will affect the future credit prospects of the person. His next credit cards and loans will come at a higher cost and with much hard work.
When the cardholder fails to make payment against his credit card for 30, 60, 90, 120, or 180 days, it will get reported on his credit report. And when he fails on payment for over 60 days, the bank reports on this to the credit bureau, which eventually impacts worse on his credit profile. After 180 days of failed payment, the credit card will be charged off, which means the bank writes off the book’s debt, showing it as a business loss.
A low credit score and a credit report with records of default on a credit card will damage a person’s creditworthiness. Due to this, his chances of getting future credit cards or other sorts of credits like home loans, auto loans, etc., will get reduced. His insurance will costs more, and he might face difficulties in getting new jobs. It is good to mention here that these days employers look into the candidates’ credit reports before hiring.
Transfer of debt account to collecting agency and legal actions
If the bank writes off the card debt from its books, it usually transfers the debt to a collection agency. The debt collection agency tries to recover the due amount through repeated persuasion. The debt can be transferred to several agencies until it is fully paid or the borrowing person is bankrupt.
Even after transferring debt to a collection agency, the bank or the collection agency can file a lawsuit against the cardholder. This legal step can take him to court for legal procedure. When the case is filed, they report it to the credit bureau, which negatively impacts the credit report.
If the court verdicts to pay off the debt, the cardholder’s salaries may get set off, or his bank accounts may get frozen. Moreover, he may have to bear the lawsuit costs incurred by the bank or collection agency.
How to keep good credit with credit cards?
To keep a good credit score with a credit card in your pocket, you must consider your spending capability. After all, you have to pay off the outstanding amount at the end of the billing cycle. Paying bills in time and keeping your card balance low will help to manage your card prudently. Also, you should check your credit report and score regularly to watch over the impact of your credit card usage. Moderate spending and excellent repayment behavior can add good points to your credit score and enrich your credit report, which will benefit you in grabbing a more valuable type of credit.
There are solutions to every distress situation, and credit card default is no exception. The cardholder may always get help from his card issuing bank in case he faces making on-time payments. Even if the bank is unwilling to restructure the payment timeline, there are consumer credit agencies to help with these hardships. But despite all of these solutions, defaulting on credit card payment is not a desirable experience to anyone.