What happens if I stop paying my credit cards?

Whether the reason is a layoff, a medical emergency, or a pile of debt that is more than you can afford, struggling to pay credit card bills is a problem many people face.  If you stop making your credit card payments, the issuer may charge you late fees and higher interest rates and your credit could be damaged. If dereliction continues for more than a few months, your account may be charged off, and you may eventually find yourself the target of a lawsuit.

The Stages of Credit Card Dereliction:

A credit card payment is considered late if it's past due by at least 30 days. Your credit report won’t show a payment that’s up to 29 days late, but your card issuer may remind you of your late payment. If you look at your credit report, this is how the credit bureaus list late payments:

• 30 to 59 days late

If you miss a credit card payment by 30 to 59 days, the card issuer will charge a late fee and the interest you owe on the balance. Also, your credit score could drop if late payment shows up on your credit report. The card issuer can report your late payment to the credit bureaus - Experian, TransUnion, Equifax. Your payment history is considered as the most significant scoring factor in credit score and late payment can hurt your creditworthiness. The exact number of points you’ll lose depends on your overall credit profile. Generally speaking, people with good to excellent credit scores lose way more points from a new late payment compared to those with low credit scores.

• 60 to 89 days late

If you miss a credit card payment by 60 to 89 days, you will be charged a late fee of about $25 to $38 per month and your interest rate will also go up. The card issuer can charge a new, higher penalty APR to your account that applies to your current balance and future transactions. If you bring your account current, you may be able to get back to your standard APR after making six consecutive on-time payments for at least the minimum amount due.

• 90, 120, 150 days late

If you miss a credit payment from 90 days to 150 days, the card issuer will continue to charge even more interest and report your late payments which will make your credit score drop even more.

• 180 days late

Around the 180-day point, the credit card issuer will likely assume it won't receive a payment on the account and will then charge off your account. This accounting procedure lets the company deduct the unpaid bill from its earnings, but doesn't forgive your debt.

The card issuer may send or sell your account to a collection agency, which will try to collect the debt. At this point, late fees and interest charges may have brought the total balance much higher than the original unpaid amount. Both the charge-off and collection account may appear on your credit reports which will further hurt your credit. Also, a creditor or debt collector can sue you to force payment of past-due debt. They may have the authority to pull money from your bank account or from your paycheck if the judgment is in their favor. They may also be able to get a lien against your property.

What to do if you are late on payments?

The situation worsens the longer you wait to deal with late payments. 

Here’s what you should if you’re late on payments:

• Call the credit card company

This is the most important step you should take if you’re not able to make payments on-time. It may be able to set you up with a hardship plan with a more affordable monthly payment amount.

• Contact a credit counseling agency

If you’re in financial hardship and can’t resume making regular payments, you can contact a non-profit credit counseling agency and ask about a debt management plan. The counselor may be able to negotiate with the card issuers to waive fees, lower your monthly payments, and bring your accounts current. You'll then make one monthly payment to the counseling agency, which will pay the credit card companies.

• Research debt consolidation

If your interest charges have grown out of control, debt consolidation either through a balance transfer credit card or a loan can help you manage payments. You'll be able to pay your balance interest fee during the card’s introductory period with the help of a balance transfer credit card but will have to pay a 3 to 5 percent balance transfer fee. A set repayment schedule for paying off your bills is offered by debt consolidation. The APRs for debt consolidation loans range from 3 to 36 percent, depending on your credit rating.

Conclusion:

We have discussed the scenarios you may face if you can’t make credit card payments on-time. Also, we have discussed things you should do if you’re late on payments.