What happens if you stop paying credit cards?

Missing credit card payments can be very damaging to your financial stability and can have severe consequences in the long run.  Missing a payment or two is fixable, but you will be charged for it.  If you stop making payments altogether, you can get in serious trouble and end up owing a lot of money.  

Late Fees and Penalties

It is important to understand the terms of your credit card, as the penalties will vary depending on what your issuer has agreed to.  Commonly, if you being to miss payments you will be charged a late payment fee that will add on to the amount you owe.  This amount will vary according to both your card policy and the amount that you owe, so again, you must understand the terms of your credit card.  The Credit CARD Act sets limits on these fees, so at most, they will be $29 for the first missed payment, then $40 for each additional missed payment.  If you miss a payment during the promotional APR period, this introductory offer will likely end and increase to the regular rate you have been given.  

Stages of Credit Card Delinquency

There are usually different stages of credit card delinquency, depending on what card you have.  This will be outlined below so that you can understand the consequences of missing these payments.  The penalties will get harsher as time goes on so it is important that you pay off your debt as soon as possible to avoid financial trouble.  

The first 30 days:   Up until 29 days, a missed payment will not be reported to the credit bureau and it will not show up on your credit report.  You will likely be contacted to remind you of your missed payment during this period.

30-59 days: At this point, you will begin to accumulate late charges on top of the interest you owe on the balance.  It is possible to get this waived if there is a valid reason for being late on a payment, especially if you are in good standing with your card issuer.  

60-89 days:  This period is when the penalty APR typically kicks in, adding to the amount that you will have to pay.  This will then make it even more difficult to pay off the debt you owe, so it is recommended that you get your payments in before the 60 day period.  

After 90 days: When the 90-day mark hits, this signals that you are in financial trouble and will have a difficult time paying off the debt that you owe.  The debt will then be passed off to a collection agency who will begin to contact you.  Your credit limit will also be lowered as a result of the missed payments.

After 120, 150, and 180 days: During these periods, the same consequences will result as the 90-day mark.  The debt collectors will step up their efforts with each period that goes by and your debt will continue to accumulate.  After 180 days, your issuer will sell off your debt to an external collection agency, meaning that they are taking a financial loss and are not expecting to be paid.  This is known as a charge-off and will result in a huge hit to your credit score.  Just because the bank has given up does not mean that you don’t have to pay.  You still owe the same amount of money, just to a different entity.  

Possible Lawsuit

At some point, the debt collectors can sue you for your unpaid credit card bills.  This varies depending on your location because it is governed by state laws.  The typical period is around three to six years but this can vary.  

Credit Score Damages

When the late payments begin to show up on your credit report after the first 30-day period, your credit score will begin to take a hit.  This will be very slight at first and can recover quickly if you make your payment in a relatively timely manner.  The drop will be the most severe for cardholders with good to excellent credit and less noticeable for those with poor credit.  This is because payment history is the most important factor when determining your credit score, so a change in the pattern will negatively affect your score.  The drops will occur every 30 days when your issuer reports them and will get more severe as you miss more payments.  As mentioned previously, when a charge-off occurs you will take a severe hit on your credit report.  

What to Do if You Cannot Pay

If you reach the point where the debt collector is threatening to sue you, debt settlement may be the best option.  This is when you make a deal to pay off less than you owe and get rid of your debt.  The big drawback to this is that you will have to pay a lump sum immediately, which can be a large amount at this point.  

Before this point, there are several steps you can take to avoid accumulating too much debt.  Early on, the most important thing you can do is call your credit card issuers to discuss the options.  They want to be paid so they will do their best to help you out and make this possible.  You can also look into balance transfer cards which make it easier to pay off debt and recover.  For a list of some of the best options, access the link here.  You can also talk to a credit counselor who will discuss options with you and help you figure out a plan to repay your debt.