What happens if I never pay my credit card balance?

If you’ve missed a payment and find yourself in debt, you’re probably wondering what repercussions you could be facing. It turns out that not paying your credit card balance can have serious consequences on your financial situation for years to come. Below is a breakdown of what happens when you do: 

One day late: 

You just missed your payment due date. When this happens, a late payment fee will typically be added to your balance. If this is your first late payment, the maximum amount your card issuer can legally charge you is $29 (as of 2020). For any additional late payments within six consecutive billing cycles, a late fee of up to $40 can be charged to your account. The amount of the late fee also can’t exceed the amount of the minimum payment that you missed. 

Many credit cards waive your first late fee or don’t charge late fees at all. To check if this is the case with your card, refer to the cardholder’s agreement. If it isn’t, call and ask your card issuer if they can waive your late payment fee. Typically card issuers will cut cardholders some slack the first time around. 

However, this doesn’t mean you won’t be penalized in other ways. Another penalty that you could encounter is an increased interest rate. If your card has a 0% introductory APR, it can be revoked and replaced with a higher APR. Whether or not this happens will depend on the card issuer.

Fortunately, a one-day late payment won’t show up on your credit report and affect your credit score. Just make sure you pay your bill right away and before the next billing cycle, otherwise, your late payment will be reported. For instance, if your payment due date was June 30th, and it is now July 31st, your payment is considered 30-days late and your card issuer has the right to report this information to the credit bureaus. This will stay on your credit report for up to seven years and can be seen by anyone who checks it. 

One month late: 

Your payment is now considered 30-days delinquent. You will continue to pay late fees and since it’s the second late fee within six consecutive billing cycles, it can be up to $40. 

If your card issuer has not yet reported your late payment to the credit bureaus, they will likely do so now. Your credit score will drop; to what degree depends on your credit history and current credit score. Generally, the better your credit score, the more points you stand to lose. For instance, a late payment can cause an excellent credit score of 780 to fall 90 to 100 points. 

Two months late: 

At this point, you will continue to rack up late fees while lowering your credit score even more. Since your payment is considered 60-days delinquent, your card issuer has the right to raise your APR to the penalty rate, which will remain effective for six months. A penalty APR is an increased APR that may be applied to existing and future balances, which means that you will accumulate even more interest on your balance. After those six months, your card issuer is required to assess your account and determine if you are eligible for a lowered interest rate. If you make your payments on time for those six months, you can lower your APR back to its standard rate. Keep in mind that even after you make up your late payments, your card issuer can keep the penalty rate effective for any new purchases you make. To find out how long the penalty APR applies, contact your credit card company. 

Three months late: 

Having not made the minimum payments for the last three months, you’re probably suffering from more than $100 in late fees, interests that have accumulated on your balance, and significant damage to your credit score. 

Given the length of overdue payments, your card issuer may close and charge off your account because they do not believe you will pay back your debt in full, but will still require you to pay them back. This means you are unable to make any new purchases with your card, affecting your utilization rate. Utilization rate is the amount of money you owe divided by your total available credit, and it factors into your credit score. Provided that your available credit stays the same, the more debt you incur, the higher your utilization rate. A high utilization rate is an indication of poor credit management and is thus reflected in a lower credit score. When your card gets closed and charged off depends on your credit card company, but could happen anytime between the 90 days mark or 180 days mark. 

More than three months late: 

At this point, your card issuers may decide to either settle the debt for less than what you owe or sell it to a collection agency who will be demanding debt payments in full. If your debt is sold to a debt collector, your account will be reported as a collection account to the credit bureaus, and you’ll have another negative mark added to your credit report. This negative mark on your report is extremely damaging to your credit score and makes it near impossible to get more credit.

Avoiding collection agencies can lead to further consequences. If you’re lucky enough, debt collections may cancel a portion of your debt, but you’ll have to pay taxes on the amount forgiven. In other cases, your card issuer or the collection agency can file a lawsuit against you in the form of a court judgment, although this is uncommon. If you lose the case and are unable to pay what you owe, then you could have your bank accounts frozen or end up paying wage garnishments, which is when you automatically give up a percentage on your earnings. Additionally, the fees amassed by your card issuer for their legal actions could be charged to you. 

Bankruptcy

If you are still unable to pay back your debt and the legal fees, consider filing for bankruptcy. Bankruptcy puts a block on collection actions from debt collectors. This also means that they can’t garnish your wages or freeze your bank account. Keep in mind that, like every other financial obligation that you fail to meet, filing for bankruptcy will appear on your credit report and drop your credit score. 

There are two types of bankruptcy you can file for: Chapter 7 and Chapter 13. The process of Chapter 7 bankruptcy involves surrendering property such as your house, car, or other valuable personal possessions to pay off your debt. An important requirement for a Chapter 7 bankruptcy is that you do not have sufficient income to pay off at least a portion of your debt. The process of Chapter 13 bankruptcy, on the other hand, involves spreading out your payments within a reasonable timeline to pay off your debt. 

Lessons to be learned: 

Not paying your credit card balance on time can set into motion a chain of events that can severely affect your financial situation. However, it happens to the best of us. If this is the case, plan to pay what you owe as soon as possible or reach out to your card issuer about your next steps. The most important lesson is that you should not be waiting around. If you want to prevent these penalties from occurring in the first place, spend within your means, set reminders to yourself to pay your bills on time, or opt for automatic payments on your credit card.