Even though some people think that defaulting on their credit card will bring some relief in terms of not having to make their monthly payments, it is far more complicated than that. In fact, when it comes to your credit score, credit card default is among the worst things that can happen. The moment you stop paying your credit card bills, everything starts going downhill fast. Sure, the consequences of missed credit card payments will be small at first, but things will begin escalating with each missed or late payment.
To put it simply, an account default is when you are unable to keep the terms and conditions spelled out in your credit card agreement, and your creditor decides that collecting the debt and getting the account back on track is not possible based on the current circumstances. At this point, the creditor may also look to take further legal action in an effort to collect the debt. Many people are in this position and it’s no reason to feel bad, though you will have to act intelligently.
Why You Should Pay off a Defaulted Credit Card
Whenever you stop paying your credit card bills, late fees will be immediately added to your credit card account. This means that your minimum monthly payments will increase, as you will have to make up for both your late fees and the payments you’ve already missed. After two missed payments (60 days), your rate will increase to the highest penalty rate. Once your penalty rate is activated, your finance charges will also increase. This means that your outstanding balance, as well as your other payments, will get even larger, which will make it even more difficult to catch up.
Oftentimes, even after you are able to catch up, the penalty rate will still remain in effect until you manage to make six timely, consecutive payments. Once this period is over, your interest rate will go down, but it may still remain in effect when it comes to any new purchases. If you have multiple credit cards from the same financial provider, those interest rates may be affected as well.
It’s also important to remember that once you fall behind on your payments, your account may be sent to collections. This means your credit card company will also start contacting you over the phone, mail, text message, and email to remind you that you owe the debt. In time, these calls coming from your credit card company, its law firm, or third-party debt collectors can become quite frustrating.
The Fair Debt Collection Practices Act allows you to write a cease and desist letter to a debt collector, demanding that they stop calling you. That same law doesn’t apply to your original creditor, however. And while these calls may start gently, they will become more frequent and more threatening as time goes on. At first, they may offer solutions like a balance transfer, repayment plans, or a discounted lump sum. If you don’t accept any of their solutions, they may turn to threats that involve wage garnishment and sale of your assets.
As mentioned, your credit score will be negatively impacted. After six months have passed, the credit card company will charge off your account, adding a serious blemish on your credit report. This will remain there for the next seven years, telling future lenders that you have defaulted on your credit obligation. This will not only affect your possibility of receiving additional credit, but it can also prevent you from getting a new job if your employer checks credit scores as part of the hiring process.
How to Deal With Credit Card Default
Once you have defaulted on your credit card debt, there are several ways that you can approach the situation. These include the following:
- Do Nothing About It – While some people may be content to ignore the situation and not do anything about it, this is a terrible idea and will have the most negative, long-term consequences. Not only will your credit report show that you have defaulted on your debt, and your credit score has taken a serious hit, but debt collectors can still sue you for what you owe, as long as the statute of limitations is in effect. And if the judgment is issued against you, your wage could also be garnished until the full payment has been made.
- Pay Your Account in Full – If you have the money and can afford to pay in full, settling the debt entirely is the quickest way to avoid being contacted by an attorney who has been authorized by the creditor to take legal actions. Some creditors may agree for you to settle your account for less than you originally owed, granted you can’t afford to pay in full.
- Negotiate – It’s also a good idea to attempt to negotiate a so-called “pay for delete.” This is where your credit card issuer or debt collector will remove the account from your credit report in exchange for all or part of the payment. Unfortunately, not all creditors may agree, but it never hurts to try.
- File For Bankruptcy – Depending on how many debts you have, as well as the extent of your default, there is also the option of filing for bankruptcy. This is, however, a drastic move, but it will keep your debt collectors at bay. You should keep in mind that bankruptcy will stay on your credit report anywhere from 7 to 10 years. It will also be a public record, as opposed to settling your debt.
If you find yourself with a default notice or on the verge of default and don’t have the money to pay your debt in full, it’s important that you speak with a debt management professional for expert advice as soon as possible. Not only are they skilled in settling your debt and lowering your monthly payments, but with the right company, you will also have access to an added layer of legal support and protection that will keep you safe during these difficult times.
They can help you navigate and choose the best debt relief option that will fit your individual needs. Nevertheless, getting rid of debt will require some degree of time and patience. What’s more, agreeing to a plan with creditors through your debt management company and not following the terms of the agreement will also affect your credit scores negatively.
What’s the Difference Between a Debt Management Plan and Bankruptcy?
While debt settlement (debt management) and bankruptcy have several similarities between them, there are also several key differences that cannot be ignored.
Debt management is a service that looks to change the terms of an agreement between a debtor and a creditor. A debt management plan (DMP), for example, is used to restructure the payment plan in such a way that it will work for both parties involved. This also means that the DMP needs to be agreed upon by both parties and should always be written down. Regardless, a DMP can reduce the amount of money owed, lower the interest, and extend the terms of the loan. Depending on the exact structure of the plan and how a debtor follows it, it can take several years before that person becomes debt-free. Still a great option given none of the debt restructuring or settlements will be public record as with bankruptcy.
Bankruptcy, on the other hand, can help you rid yourself of substantial debt. Unfortunately, the type of bankruptcy you receive is never guaranteed and you still have to pay back a sizable amount of owed debt if the judge deems you are able. Nevertheless, to file bankruptcy is a short-term solution that can have great negative effects over the long-term. It should always be considered as a last resort by people with severe debt who have no conceivable means of covering minimum payments or a debt management plan’s monthly payments. When compared to a debt management plan, which is voluntary, and creditors are not obligated to agree to it, the financial institution will have to accept the bankruptcy.
It’s also important to remember that only unsecured debts that are not guaranteed by property or other assets fall within the terms of a DMP. However, when it comes to the latter, any proceeds from the assets and property held by the debtor can be submitted to pay creditors. With a debt management plan, the monthly payment for all unsecured debts will be provided to a special settlement account administered by your debt management company. What’s more, a DMP is a discrete process that does not involve a judge or a public record, as is the case with bankruptcy.
If you find yourself on the verge of defaulting on your credit card debt or have defaulted already, the best course of action is to get back on track and become debt-free. But as we’ve seen, this can be easier said and done, particularly during this uncertain period of economic hardship. Navigating all of the intricacies of getting out of debt is not solely about determination.
Finding the best solution for you will often involve a lot of serious negotiation and financial literacy that not everyone possesses. By working together with a debt management professional, you will be one step closer to getting out of debt once and for all. So, instead of struggling with your credit card debt, let’s figure out a solution together!