The Consequences of Not Paying Your Credit Card Bills
While I strongly recommend paying your cards off in full every month, paying the minimum payment is a lot better than not paying at all. I’d do anything it takes to make that minimum payment. You’ll avoid all sorts of consequences.
But let’s assume this isn’t an option. What happens next?
1 Missed Payment or 30 Days Late
If you think you’re not going to be able to pay your credit card bill, the first thing you need to do is call your credit card company. Explain to them your situation. Be nice and honest while telling them why you cannot pay the bill.
There’s a good chance they will sympathize with you. They might even waive off the late fees and not add the late payment to your credit report. Here’s a script to help you out:
YOU: Hi, I noticed I missed a payment, and I wanted to confirm that this won’t affect my credit score.
CREDIT CARD REP: Let me check on that. No, the late fee will be applied, but it won’t affect your credit score. (Note: If you pay within a few days of your missed bill, it usually won’t be reported to the credit agencies. Call them to be sure.)
YOU: Thank you! I’m really happy to hear that. Now, about that fee . . . I understand I was late, but I’d like to have it waived.
CREDIT CARD REP: Why?
YOU: It was a mistake and it won’t happen again, so I’d like to have the fee removed.
Don’t say, “Can you remove this?” Say, “I’d like to have this removed.” At this point, you have a better-than-50-percent chance of getting the fee credited to your account. But just in case you get an especially tough rep, here’s what to say.
CREDIT CARD REP: I’m very sorry, but we can’t refund that fee. I can try to get you our latest blah blah marketing pitch blah blah. . . .
YOU: I’m sorry, but I’ve been a customer for four years and I’d hate for this one fee to drive me away from your service. What can you do to remove the late fee?
CREDIT CARD REP: Hmm . . . Let me check on that. . . . Yes, I was able to remove the fee this time. It’s been credited to your account.
With a bit of luck, you can avoid all the consequences from missing one payment.
2 Missed Payments or 60 Days Late
If you miss two payments, you won’t be able to talk your way out of it. Worse, all the extra fees and interest start to grow exponentially.
The late fee from the first month doesn’t just sit there. You then pay interest on it. Now add more fees and more interest.
Even if you dodged the fees on the first missed payment, you should definitely expect these consequences by your 2nd missed payment:
Multiple missed payment fees, around $35 each
Your credit score will drop by more than 100 points
Your APR will spike, possibly up to 30%
The APRs on your other cards will also jump even if you haven’t missed a payment
The fees and interest won’t have grown too badly by this point. There’s still a chance to get ahead of it, pay the card down, and recover. It will take you years to get your credit score back to the same point but you’ll be fine in the long-run.
Even if you can only make minimum payments at this point, find a way to make it happen. That will buy you time and prevent the serious consequences from kicking in.
3 Missed Payments or 90 Days Late
If you haven’t paid your bill for more than three months, the credit company believes you are in financial trouble.
At this point, there’s a high chance that the credit company will cancel your account.
You will again be charged a late fee in addition to the accumulated interest. Your credit score will nosedive, and your missed payments will be recorded for 7 years.
The credit card company could also hand over your account to an internal or external collection agency. In most cases, the creditor will try to work out an alternate payment plan with you. This is called a settlement offer. It gives you one last chance to get off the hook by paying the amount you owe as a one-time payment. When they reach out to you with the offer, take it really seriously. Find any way to get it paid. Things only go downhill from here.
6 Missed Payments or 180 Days Late:
The late fees and interest will be completely out of control by this point. You’ll look at your balance, how fast it’s growing, and wonder if you’ll ever get it paid off.
At this point, the credit card company assumes that you will never pay them back. If Your account hasn’t been closed yet, it definitely gets turned off at this point. The debt also gets passed to a collection agency.
A collection agency will try to recover the amount you still owe. It will contact you and try to work out a deal. If even that doesn’t work, your debt may be sold to different collection agencies. All of them have the same rights as the credit card company.
Expect to get harassed on every turn. If you have a landline, it won’t stop ringing. You’ll get relentless calls on your cell. Endless emails. Collection agencies won’t give up until the debt gets paid.
If you cannot settle your debt, the creditor or collection agency may file a lawsuit against you.
The Math Hurts: Interest Rates and Late Fees
One of the nastiest parts about not paying credit cards is how the fees and interest rates start to compound on each other.
Let’s assume you have a credit card with a $1000 balance and a $15% APR. Then you stop paying.
Late fee: $30
Interest: 15% on your original $1000 balance
Total balance: $1042
Late fee: $30
Interest: Increased to 30% from the late payment
Total balance: $1098
Late fee: $30
Interest: 30% on the previous month’s balance
Total balance: $1155
Late fee: $30
Interest: 30% on the previous month’s balance
Total balance: $1214
After a few months, we already owe an extra $214 on the card. Our balance increased by over 20%. This also assumes we haven’t used the card at all, doesn’t account for APR increases on other cards, and that the credit card company didn’t hit us with more fees along the way. In reality, the total owed from missed payments will be higher.
How Your Credit Score Will Be Impacted
A credit score is a fancy term that grades you between 300 and 850 on how likely you are to pay back a loan. The most popular credit scoring system has been developed by a company called Fair Isaac Corporation or FICO for short.
There’s a lot of factors that produce your final credit score. But there’s two that get impacted directly by your credit cards:
Payment history: This makes up 35% of your total credit score. Ideally, it should show a long history of flawless payments every month on all your credit cards. If one payment gets missed, it drags your overall credit score down a lot.
Amount owed: The money you owe makes for 30% of your total credit score. Non-payment of your credit card bill is going to increase the amount you owe relative to your income and credit limit. That will further lower your credit score.
If you haven’t paid your bill for 30 days, a credit score can DROP by 110 points.
Every additional payment will keep reducing your credit score as every new missed payment gets reported. And if the account goes delinquent, that appears on your credit report for the next 7 years. This massively lowers your score until it’s finally removed.
Why does the credit score matter?
With an awesome credit score, you can borrow money cheaply and get approved for the accounts that you want. On the other hand, a low credit score will impact your chances of getting another credit card, a home loan, auto loans, renting an apartment, getting insurance, or even a job in the future.
A lower credit score makes every part of your life more expensive.
A high credit score = lower interest rate = lots of savings.
A credit score above 760 is considered GREAT. You will start feeling the pinch if it drops under that.
Here’s an example of how your credit score affects the amount of interest you pay on loan:
Let’s take a 30-year fixed loan of $200,000.
If your credit score is between 760-850, you will pay a total interest of $119,626 at an APR of 3.408%
If your credit score is between 700-759, you will pay a total interest of $128,560 at an APR of 3.63%
If your credit score is between 680-699, you will pay a total interest of $135,776 at an APR of 3.807%
If your credit score is between 620-639, you will pay a total interest of $186,380 at an APR of 4.997%
In this example, having a better credit score would save you $66,754 for the exact same house.
Dealing With Collection Agencies
Getting contacted by a collection agency is stressful. It’s not an ideal situation to be in, but it’s far from the end of the world.
So, first of all, take a deep breath.
Keep the following points in mind:
Remember to be honest and open in all your communication with the collection agency as it will make the experience more positive. Don’t ignore the collection agency and reply to them when they contact you.
Get everything in writing
Within five days of being contacted by a collection agency, you should have been sent a written notice that contains all relevant information about your debt. It includes stuff like the creditor’s name and a breakdown of the amount you owe.
Check the numbers against your own records. Report inconsistencies, if there are any. If the collectors verbally promise a deal to settle for a lower amount, then make sure you get it on paper. Similarly, if you have any requests, make sure you have a written note of it.
Prepare for the worst
While everything may seem chaotic, you need to know your rights as a consumer.
Many states have laws that prevent harassment from collections agencies. But they’ll stretch these rules to the absolute limit. They might not call during “off-hours” but they’ll call relentlessly during the day. Not every agency pushes the limits but many do.
Hire a lawyer
If a collection agency files a lawsuit against you, you need to get a consumer lawyer. Having representation in court increases your chances of a fair and accurate trial. The lawyer will also advise you on stuff like the statute of limitations and the best way forward.
Always be cautious while sharing data with collection agencies. You don’t want to hand them any information that can be used against you. This includes sharing your bank account statements and sending them money directly from your bank account. It’s better to use a third-party service provider in such cases.
The debt collection agency can use any information you share to recover dues from you.
Verify the agency
While there are legitimate debt collection agencies, some are scams and frauds. Always be sure to check the agency’s name, address, and number to be sure you are dealing with a genuine agency.
Pay immediately to save
Collection agencies know that the longer a debt goes unpaid, the odds of collecting it go down. Yes, they want to get paid the full amount but they really want to get paid right now.
They’re often willing to give you a discount on the total owed if you pay immediately.
The one time I dealt with a collection agency over an unpaid medical bill that I missed, I was completely willing to pay it in full. I just needed a few days to transfer funds between accounts. The collection agency asked me if I could pay a lower amount immediately and I said yes. I paid, they closed the debt, and that was the end of it. I inadvertently saved a few hundred dollars.
Better Options to Consider
You may try your best to pay your debts, but you just can’t do it. If you’re unable to pay your credit card bill and your financial situation is not improving, you have a few options.
Earn More Money
Earning more money may seem hard, but it’s the most straightforward way to pay your debt. If you work extra hours at your current job, take up a part-time gig, or sell stuff online, you will earn extra cash. Even an extra $25 each month can make that minimum payment, buying you more time.
If your credit card debt is getting out of hand and you just can’t pay it, you could sell your stuff to pay dues. I know you will be emotionally attached to a lot of things, but paying back overdue debt can give you mental peace.
Credit Counseling Agencies
Reach out to a credit counseling agency. They will speak to the creditors on your behalf. Their aim is to consolidate your debt and create a plan that works for both you and the creditors. Such counseling agencies might charge a fee for their service.
You only pay a fraction of the amount you owe when you go for debt settlement. This may seem like a good idea, but the amount can still be a large sum. Opting for debt settlement also hurts your credit score.
If all else fails, as the absolute LAST resort, you can file bankruptcy. Think long and hard before taking this step and consult a lawyer before doing it.
Chapter 7 bankruptcy wipes out your debt from unsecured loans like credit card bills. Chapter 13 bankruptcy restructures your debt with a long-term payment plan.
Bankruptcy will stay on your credit report for up to a decade. Opening new accounts in the future will be extremely difficult.