So you’ve run up a balance on your credit card and you just don’t have the money to pay it. Maybe it doesn’t seem like a big deal to miss one payment. How much could one ding hurt?
It turns out even one late payment is a big deal: It sets into motion a chain of events that can affect your credit and your whole financial situation for years to come. Here’s what really happens when you don’t pay your credit card bill.
The First Month
If you miss one monthly payment, you’ll have to pay a late fee, which could be charged even if it’s just a day late (check the fine print for your credit card). The fee is capped at $27 for the first offense, says Emily Sanders, CPA, managing director at United Capital’s Atlanta office. You may also see your interest increase. It’s up to the card issuer to determine exactly how late your payment must be before your rate is increased, and how much to increase it — but when your account is past due, your credit card company can legally raise your rate to up to 29.99 percent for future purchases.
Missing a payment can also impact your credit score right away. On-time payments are the most important factor in the FICO formula, so your FICO credit score could drop a few points once your payment date passes.
2 to 3 Months
If your payment is more than 30 days late, your account will be reported to the credit bureaus, says Beverly Harzog, consumer credit expert and author of The Debt Escape Plan. The missed payment could remain on your credit report for up to seven years, but you can minimize its damage to your score by making on-time payments going forward.
When your account is between 60 and 90 days past due, the card issuer will usually block you from charging new purchases, says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network. And if you continue to avoid paying your credit card, you’ll rack up more late fees. (After the first missed payment, the late fee is capped at $37 for subsequent lapses, per the Credit CARD Act of 2009, and is adjusted annually for inflation, Sanders says.)
That interest rate increase of up to 29.99 percent becomes much more likely once your payment is more than 60 days past due. While the CARD Act typically protects you from having an interest change applied retroactively to your outstanding balance, “this is an exception,” Harzog says. If your account is more than 60 days past due, the issuer can legally apply the new interest rate to your entire outstanding balance.
Before you panic about getting slapped with a hefty interest increase on your current balance, know that your credit card issuer is required to give you a 45-day notice before raising your rate, Harzog says. If you can pay before the 45 day-mark, you’ll avoid the penalty.
At this point, you’ll start getting annoying phone calls from your credit card company, and they’ll increase your interest rate once you hit the 90-day mark, says Gallegos.
4 Months or More
If you stop paying your credit card bill for several months, your account will be “charged off” — or considered unlikely to be paid back — and sent to a collection agency, Harzog says. Once you’ve been sent to collections, your credit card company “will no longer negotiate with you because they no longer own the account. You'll have to deal with the collector,” she says.
Having an account sent to collections can wreak havoc on your credit score, and it can stay on your report for up to seven years. Having this black mark on your report makes it much harder (if not impossible), to get more credit, like opening new cards, securing loans, and applying for rentals, Gallegos says.
Not only will you hear from collectors chasing down your payment, but you also may hear from the IRS. “The IRS sends out a Form 1099-C for ‘canceled debt,’ notifying you that you will be required to pay taxes on that debt,” he says.
In some cases, rather than declaring your unpaid debt a charge-off, the card issuer could decide to take legal action to try to receive payment in the form of a court judgment, Gallegos says. “If that happens, you have to pay — and, of course, it’s a very negative item on credit reports.” While this is uncommon, you’ll want to avoid it at all costs. If the creditor wins the case and you don’t have the money to pay, you may end up having to pay wage garnishments, which can be up to 25 percent of your earnings, depending on your state, he says.
The Long Term
The damage to your credit score from repeated missed payments has a significant impact — your credit score is your entry ticket for most of adult life. Most people know that a poor score can hurt your ability to rent an apartment, buy a home, and buy or lease a car, for instance. But a bad score can cause even more problems: Harzog says that insurance rates are also tied to credit scores, and “more and more employers are starting to look at the credit reports of job candidates.”
Dig Yourself Out
If you simply can't make your minimum payment, start by calling your credit card company’s hardship department, Harzog says. If you have a true temporary hardship — such as a layoff — but you previously paid your bills on time, your creditor may work out a payment plan for you.
If you have a more dire situation, you do have options, but you’ll need to move fast to avoid even more late fees and hits to your credit.
If you have several credit card accounts with high interest rates, consider consolidating the debts.
Debt negotiation companies will work on your behalf to lower your principal balances. Do your research and make sure your debt negotiation company isn't promising you more than it can provide. “It can be a long process and is best suited to people who would otherwise need to consider credit counseling or bankruptcy,” Gallegos says.
Credit counseling agencies can help you reduce interest rates. But while this option can help some borrowers, it may not be the best option for people with large amounts of debt and who aren’t able to pay, as “lowering interest rates just isn’t going to help that much,” Gallegos says.
The Last Resort
If you’ve exhausted these options and still can’t pay your debt, you can file for Chapter 13 bankruptcy. Filing for bankruptcy does require you to repay debt on repayment plans, and these are generally “less favorable than those found with debt negotiation,” Gallegos says.
If you’re considering filing for bankruptcy, you should speak to an attorney in your state. But, Gallegos says, “think long and hard before considering bankruptcy. It can be expensive and painful, and it impacts a credit rating for many years.”