From 2020 to 2021, total consumer debt in the U.S. increased 5.4% from $14.53T to $15.31T, with the average consumer holding $5,221 in credit card debt, according to Experian’s latest Consumer Debt Review. As the average American’s credit card balance climbs higher and higher, you may be wondering, “What happens if I don’t pay my credit card for 5 years or more? Will I get penalized?” While you may feel some relief initially, your financial health will be negatively affected the moment you stop paying off your debt.
As you miss more payment deadlines, you can expect your credit scores to take a hit, late fees and higher interest rates, account collections, and debt-collection lawsuits. In other words, the longer you miss your monthly payments, the more severe the consequences. That is why you should face credit card debt head-on and prioritize paying it off. We will go over your options and the repercussions in detail below so you can minimize the impact of failing to meet your credit card’s minimum payment.
- If you fail to pay your credit card bills, you may face serious ramifications depending on how many payments you miss and your credit card company’s policies.
- There are plenty of ways to get out of debt, and most people manage just fine once they have a strategy in place. We will outline 7 action items you can take to get back on track.
Possible Consequences If You Can’t Pay Your Credit Card
We get it emergencies happen, life gets in the way, and now you’ve missed a credit card payment or two. Still, it is helpful to know what the potential repercussions are and what to expect.
Late Fees and Higher Interest Rates
Credit card issuers typically consider a payment late when it is 30 days past your payment due date and will not report your missed payment to the credit bureaus until then. Others only report late payments if they are 60 days overdue. However, even if creditors do not immediately report it, you could get hit with a late payment fee ranging from $25 to $40+. A few years ago, when I was late on a credit card payment by a few hours, I was immediately charged a $25 fee, though it did not affect my credit.
Typically, when you are late on a payment, your creditor will send an overdue notice via email, letter, or phone call. When you receive these forms of communication, make sure to respond as soon as possible. If you do not stay proactive and work with your lenders, it only makes things worse in the future. By actively communicating with your creditors, they will be more sympathetic to your situation and be willing to help. For example, recently, I forgot to make a payment on one of my credit cards and received an email from my bank the next day. I emailed them immediately and asked for a one-time late-fee waiver as it was my first time missing a payment with them, which they granted shortly afterward.
The damages for a payment that is 60 days overdue (2 missed payments) will be worse than one that is 30 days late (1 missed payment). Depending on the card and its terms, you may also get charged a penalty annual percentage rate (APR), meaning your interest rate can dramatically increase from 8% to 30%+. So, in addition to late fees that get piled onto your bill, your minimum monthly payment starts growing because you will need to repay the amount you owe at higher interest rates. The more behind you fall, the harder it gets to catch up as you will be subject to additional fees and penalties.
Lower Credit Scores
Your payment history is a significant factor in your credit score calculations. As you become 30, 60, 90, 120, and 180 days late on your payments, these will get reported to the credit bureaus. The later you pay, the larger the impact on your credit. In particular, a continuous pattern of missed credit card payments is a red flag to the credit bureaus, and they will reflect that in your credit scores.
If it drags your scores down enough, that can severely hinder your ability to qualify for competitive terms on a mortgage, auto loan, personal loan, credit cards, and other types of loans in the future. If your credit history already has issues, you may not see as large of a drop, but the damages will still blemish your credit.
Account in Collections
Once you are 90 days late on your payments, your credit card company will likely shut down your account and send it to a third-party debt collector or a collection agency. If this happens, these agencies will ramp up efforts to get payments for your debt and pursue the harshest possible legal actions available in your state.
When a credit card account is 180 days past due, your account will most likely get charged off, though the decision about when to charge off depends on the credit card company. A charge-off is the same as a delinquency and stays as a negative mark on your credit reports for 7 years. The more charged-off accounts you have, the worse your credit scores will be. In this scenario, your account is permanently closed, and unpaid debt gets written off as a business loss. However, that does not mean your debt gets forgiven you will still be held responsible for paying the amount owed.
When your account is charged-off, it will usually get sent to various credit collection agencies until the debt is paid off (or discharged) in bankruptcy. At this point, debt collectors will employ various tactics to recoup the missed payments. In some states, your card issuer can sue you for the debt while in others, a lien may get placed on your bank account, wages, properties, or other assets. While you do not have to worry about going to prison, you will face mounting financial costs and damages.
If you get hit with a debt collection lawsuit, consider consulting with an attorney through a local legal support program or a private firm that has experience dealing with debt collection and bankruptcy cases. If the outcome of the court judgment favors the credit card issuer, the judgment could allow your creditor to access your bank account or wages, for example.
Alternatively, your creditor may allow you to settle your debt instead of having you go to court. With a debt settlement, your credit card issuer agrees to accept less than the amount you owe in a lump-sum payment.
7 Options If You Can’t Make Your Minimum Payment
If you think you are at risk of missing payments, contact your credit card issuer and stay proactive. Many creditors have policies and programs available to help borrowers who are falling behind. The longer you put off dealing with late payments, the higher the stakes. To get back on track, here are 7 things you can do today:
1. Review Your Budget
Budgeting is key to reducing and eventually eliminating credit card debt. When you create and stick to a budget, you know exactly how much money you have available to spend each month. That makes it easier to avoid overspending and racking up more debt on your credit cards.
A few simple steps that can help make budgeting easier and more effective include:
- Tracking your spending for a few months to get a good understanding of where your money is going.
- Setting realistic goals for yourself based on your income and expenses.
- If you are overspending, either find ways to cut back or consider a side hustle to increase your income.
- Be disciplined in sticking to your budget – that means resisting the urge to splurge on unnecessary items.
2. Turn on Automatic Payments
You do not need to worry about missed payments or late fees when you have automatic payments set up for your credit cards. This system takes the hassle out of paying your bills each month and ensures you never miss a payment. Plus, some credit card companies offer a discount on your interest rate if you sign up for automatic payments. So, not only do you avoid late fees and penalties, but you can also save money on your monthly statement. If you choose this option, be sure to keep enough money in your bank account each billing cycle to cover the payments.
3. Try Moving Your Payment Due Date
Sometimes it feels like our bills are all due on the same day, or our paychecks do not come at the best time to cover our expenses. When I was in college, my paychecks would come around the same time as my payment due dates, which often stressed me out because I did not always have enough in my bank account to cover my bills. This cycle can cause some serious financial problems down the road, especially if you carry a high balance on your card month to month.
But, there is a way to move your payment due date for credit cards. That’s right you can change when your bill is due, giving yourself more time to pay it off. All you have to do is call your card issuer and ask them to change your billing cycle. Depending on your situation, your lender may work with you to move your payment due date and give you some flexibility in the long run. This small change could mean major savings in terms of interest payments and late fees and may be just what you need to get back on track financially.
4. Call Your Credit Card Company
If you anticipate missing a payment or two, notify your credit card company ahead of time to explain your situation to them. Make sure you have a clear grasp of your financial situation so you know how much you can afford to pay. If you communicate in good faith, the creditor may be willing to waive the late fee or offer some type of relief or hardship program, such as lower monthly payments or a waived minimum payment.
5. Research Debt Consolidation
Debt consolidation is the process of combining several loans into one loan. The purpose of debt consolidation is to get a lower interest rate, simplify your payments, and/or get rid of some bills altogether. When you consolidate your credit card debt, you are taking all your credit card balances and transferring them to a new credit card with a lower interest rate, such as a 0% APR credit card. That can be helpful if you are struggling to make multiple monthly payments at high-interest rates.
However, before consolidating your credit card debt, do your research and compare different offers from different lenders. Many companies offer debt consolidation loans, but not all of them are created equal. Some may have higher interest rates or fees than others – so it is important to find the best deal for you.
If you decide that consolidating your credit card debt is the right decision for you, there are a few things that you need to keep in mind:
- Confirm that the new interest rate is lower than what you were paying before. If it’s not, then there is not much point in consolidating your debts.
- Avoid taking out another loan just to consolidate your debts – this will only create more problems down the road.
- Read over the terms and conditions carefully before signing anything – this will help ensure that you understand exactly what you’re getting yourself into.
6. Consult with a Credit Counselor
If you are struggling to make ends meet or have fallen behind on your bills, consider consulting with a credit counselor. They can help you create a budget, monitor your expenses, and get your finances back on track. They can also help you negotiate with creditors and work out a debt management plan that is affordable for you.
If credit counseling seems too expensive, look for nonprofit credit counseling agencies such as the National Foundation for Credit Counseling and the Financial Counseling Association of America. These agencies assist consumers with finding credit counselors who offer free initial consultations. Note that you should be aware of potential fees and be wary of promises that your debt will get wiped away or your credit will increase quickly.
7. Monitor Your Credit
There is no doubt that keeping tabs on your credit score is important for your financial health. After all, your credit score dictates the types of financial vehicles and terms you qualify for when you borrow money. A high credit score means you are a low-risk borrower and can likely qualify for lower interest rates. A low credit score means the opposite you’re considered a high-risk borrower and will likely have to pay more interest if you take out a loan.
That’s why it’s so important to monitor your credit report regularly and make sure there are no errors on it. If there are any mistakes, be sure to dispute them with the appropriate bureau. You don’t want an inaccurate record damaging your chances of getting favorable borrowing terms in the future.
Additionally, you should keep track of how much debt you are taking on. Try not to borrow more than you can afford to repay each month, and always make at least the minimum payment on time every month. That will help keep your debt levels under control which is another factor lenders look at when considering whether or not to give someone a loan.
The Bottom Line
Late payments on your credit cards can be very costly and damaging to your credit score. However, there is no need to panic as there are ways to recover from this mistake. Work with your financial institution to create a credit and debt management strategy that allows you to better manage payments. Stop using your credit cards if possible to avoid adding more debt to your accounts. Moving forward, find areas to reduce spending and keep debt low. Rebuilding your credit takes time, but as long as you keep up healthy financial habits, you can recover in no time.