Default credit card: what to do about it
During troubled economic times, consumers who have been negatively affected (by job loss or other circumstances) need to prioritize how they spend their money. In these situations, credit card payments often come at the bottom of this list. And if you get to the bottom of it and find that there’s nothing left to give away, those cards might not get paid. If enough time passes, you can then enter the country of the credit card default.
What does your priority list look like? Keeping a roof over your head, eating at your table, and commuting to work are top of the list. This means paying your rent or mortgage and associated necessary utilities, such as water, electricity, and gas. Food on your table means buying it from the grocery store or enjoying the pantries (or a combination of both). Getting to work can mean buying gas and paying for a car.
Other necessities, like prescriptions or diapers, might also be high on your priority list. If you are unemployed and looking for work (or planning to do so in the future), your list should also include keeping your credit report clean for potential employers who might get credit reports in connection. of the hiring process.
Whatever your priorities, it’s easy to see what’s important when it’s listed and why credit card debt seems to come in last. It’s not that the debt isn’t important; it’s just that other things have to come first. Still, it would be a big mistake not to make any payments if you can afford the minimum. Credit is a powerful tool and having it available to you when things return to normal is smart. Let’s take a closer look at credit card default and what it means.
How does credit card default occur?
As noted above, when you do not pay your credit card bills for an extended period of time, your card may enter default status. The fault is different from the offender. You become past due after missing a payment for 30 days. The default usually occurs after six consecutive months without having made at least the minimum payment due. Make no mistake, during this time you will be contacted by your creditor and they will want to know what you are going to do about it. If they are not happy with your response (or lack thereof), the account will be closed and after 180 days without payment, reported as debited to the credit bureaus.
How Credit Card Default Affects Your Score
Once your account is overdue, your credit score is going to be negatively affected. When your account is debited, the damage becomes more serious. Late payments are not immediately reported, for example if you miss your due date by a few days. This usually happens when you are at least 30 days late. But once that happens, your score is likely to spiral downward.
Each month of non-payment will mean another blow to your score as the default ages and balances owed increase due to interest and fees. And an actual default will likely cause the card’s line of credit to close, resulting in an increase in the 100% credit utilization rate on the account. To add insult to injury, it can be turned over to a collection agency, placing you in another category of bad for your score. (A notable exception to this rule is for medical bills. They are not reported as overdue until they are six months old.)
For those of you looking for a job, the main concern is not your credit score, which employers don’t usually care about, but your credit report. It is still common (it was virtually guaranteed before) for employers to complete a credit report as part of the interview process. A series of failures or faults could make you less competitive. My advice is to at least make the minimum payments until your research is complete to make your credit report as impressive as possible.
What to do in the event of a credit card default
You have several options for managing your debt. You can keep paying, try to pay off the debt for less than you owe, or file for bankruptcy. It could be argued that there is a fourth option, which is to do nothing. But ignoring the problem won’t make it go away, at least not for a very long time. If you are able to evade your creditors until the debt statute of limitations is reached, you cannot be successfully sued for the debt in court. But remember, even in this unlikely scenario, you still owe the debt, so you haven’t actually dealt with the debt.
And we’re talking about years here; depending on where you live, the statute of limitations can range from three to 20 years. It’s a long time to dodge a creditor. In the meantime, your credit score will likely get worse. Let’s look at the three options and also consider one option which is really a combination of the three.
Pay in full
Paying off your debt in full is the best way to deal with a default. While the creditor would love if you could write a check for the full amount, you came here for a reason, and having the money to pay it off all at once can be impossible. So, a payment plan may be the only option. Fortunately, many creditors are willing to work with clients to develop a short-term plan with lower payments or lower interest charges. You just have to ask.
You can also try to settle the debt by paying less than you owe. But these negotiations are not without danger. Remember, if more than $ 600 in debt is canceled, you will have to pay taxes on the canceled debt. As with any negotiation, make sure you put everything in writing and make sure that the language clearly indicates that the debt will be considered paid in full. Otherwise, you may find that the creditor or collector has sold the remaining part of the debt to another collector, who may then come after you for the balance.
For the record, I don’t recommend using debt settlement companies. They tend to be contradictory and have a terrible track record, leaving you both in debt and a very upset creditor.
Third, bankruptcy may be in your future if you ultimately can’t take care of the debt. As part of your decision making process, I would recommend hiring a nonprofit credit counseling agency. You will need to have credit counseling as part of a bankruptcy filing anyway. But if you call the agency first, they may be able to help you overcome the emotion and fear of facing debt to determine your best course of action.
Debt management plan
Finally, you may be able to combine the features of all of the above by using a debt management plan offered by a nonprofit credit counseling agency. If you qualify, they’ll get you preferred repayment terms, with concessions to fit your budget for up to five years. A DMP is similar to a Chapter 13 bankruptcy, but without the damage to the credit score. Contact the National Foundation for Credit Counseling to find a trusted member to help you find the best solution.
How to avoid credit card defaults
As with everything, prevention is better than cure. If you find yourself in a situation where you feel you cannot make your payments, contact your credit card company immediately. Most creditors have systems in place to reduce your payments for at least a while through a hardship program. These programs are usually not long term, but may be enough to get you to the other side. Communicating early with your creditors is your best hope to avoid default.
Defaulting on your credit cards is never a good thing, but sometimes it can’t be helped. Knowing what the cost will be to your score before you take action will help you make the right decision for your situation.