When you default on your credit card, a number of things happen. Many people fear they will go to jail for their unpaid debts. Here’s the good news — not paying your credit card bills is not a criminal act and you will not go to jail.
What does it mean to default on your card? When you miss a payment by more than one billing cycle, it is considered a default. Typically, default penalties apply after 60 to 90 days. At this point, your creditors will report the debt to the major credit agencies, where it will negatively impact your credit score, your ability to get a loan, and more.
The Impact of a Late Payment on Your Credit Score
On-time payments account for 35% of your credit score — a high percentage. But it’s not as bad as you may imagine. Payments under 60 days late may be reported to the credit agency, and your score will take a temporary hit. The late payment will stay on your credit reports for up to seven years — but your credit score can rebound much faster than that if you proceed to make on-time payments.
Even one 90-day late payment, though, will stay on your credit report for up to 10 years and do serious damage to your credit score. A 90-day late payment — a default — is as bad as a bankruptcy or repossession. It can prevent you from getting any sort of new credit for two years after the date of the default. A payment that is 90 days late (or more) is a sign to lenders that you may default on other loans, as well. After 60 days, the bank will probably make attempts to collect the debt with letters and phone calls — missing a payment by more than 90 days cannot be chalked up to merely “forgetting” to pay.
Here are a few things credit card companies can do if you make a payment more than 60 days late:
What Creditors Can Do If You Default on your Credit Card
- Raise your interest rate
- Lower your credit limit
- Charge late fees
- Call your home during specific hours to request payment
- Send the account to collections
- Report it
to the credit agencies
- Take you to court
However, the law gives you some protection against creditors. Here are some actions they cannot take, by law:
What Creditors Can’t Do If You Default on Your Credit Card
- Arrest you
- Re-possess merchandise purchased with the card
- Harass you or be abusive during phone calls
- Call your place of business if you request them not to
- Call third parties to attempt to collect the debt (unless you’ve given prior permission)
If Credit Card Debt Goes to Collections
Banks usually wait until your payment is more than 120 — or even 180 — days late before they send the debt to a collections agency. Collections agencies get a portion of the payment (that’s how they earn their money) so a creditor only wants to do this as a last resort.
As for taking you to court? That’s even more rare due to the time and costs involved. If they do, and they win and file a judgment against you, be prepared to pay the debt in its entirety and also to pay legal fees. Laws vary by state regarding whether they can garnish your wages or not.
Financial Counseling as an Alternative to Loan Default
If you are being harassed by creditors and cannot make your credit card payments, it’s time to seek financial counseling. In fact, it’s best to contact a financial counselor before you miss a payment by 60 days, so you can protect your credit. Financial counselors can help you negotiate a settlement for your debt and also work with you to create a plan so you can get out of debt. You can find a reputable financial counselor through the National Foundation for Credit Counseling.
If you negotiate a settlement or payment plan, your credit card company may offer you a lower interest rate or agree to let you make smaller payments. Any settlement will still affect your credit score and your ability to get new credit, but it won’t hurt as badly as defaulting on your credit cards and other loans — and you can avoid phone calls from creditors and the sick feeling that comes with having debt you can’t afford to pay.