Understanding Credit Card Delinquency

When money is tight and you can’t afford to pay all of your bills, what do you do? 

A growing number of Americans are facing this tough question, and having to choose which debt payments to cover and which to skip. According to data from the New York Fed Consumer Credit Panel and Equifax, a growing number of people are choosing their mortgages and car payments over credit cards. The result? Around 7% of credit card accounts are now delinquent, meaning the payment is at least 30 days late. 

If you’re in a position where you’re choosing between debt payments, it’s always important to put necessities like your mortgage and car payment first, but missing a credit card payment does have its consequences. Here’s what to expect when your credit card payment is delinquent.

What Exactly is Credit Card Delinquency?

A credit card payment is considered “late” if the creditor receives your payment after 5 p.m. on the due date. But if you miss your payment by 30 days or more, or if you pay less than the minimum due, the credit-card issuer considers your account “delinquent.” 

How serious is credit card delinquency? There are serious financial penalties that kick in as soon as you’re just a few hours late, but they get much worse once your account is in delinquent status. These penalties often include late fees and a higher interest rate on your account. Plus, the missed payment will show up on your credit reports and cause your credit scores to drop.

What Happens When You’re Delinquent?

When you’re delinquent on a credit card payment, unfortunately you can expect a long list of penalties. Each credit card company has different policies for dealing with overdue payments, but these are the common penalties to expect when your credit card payment is delinquent:

• Late fee: The late fee is usually $30 to $40 and can increase with each late payment.
• Authorization hold: The creditor can put a hold in place to prevent you from making new charges.
• Interest accrual: You’ll accrue interest charges on your balance and outstanding fees until they’re fully paid off.
• Rate increases: Promotional offers, like 0% APR, can be forfeited early. Your interest rate can also shoot up to a penalty rate (usually 29.99% APY) for six months or more.
• Credit damage: Your credit scores will drop each time a missed payment shows up on your credit reports, and the missed payment will stay on your credit reports for seven years.
• Lower limits: The creditor can decrease the spending limit on your card. When other creditors see a missed payment on your credit reports, they might lower your limits as well.
• Contact from the creditor: The credit-card company may be aggressive about contacting you to seek payment. 

The Long-Term Impact 

When it comes to unpaid credit card debt, the penalties get worse over time. Here’s how your credit card delinquency could impact you in the long term. 

Interest and late charges

Falling behind on a credit card payment has a snowball effect: The farther you fall behind, the more interest and fees you’ll owe and the harder it will be to catch up.

For example, let’s say you owe $5,000 on your credit card, your penalty fee is $40 and your penalty interest rate is 29.99% APY. If you’re 30 days delinquent, your balance will increase to $5,166. After 60 days, the balance will increase to $5,295. 

As a result of having a higher balance, your minimum monthly payment could increase, too.

Credit damage

When one late payment shows up on your credit reports, your credit scores can drop by as much as 100 points. If your creditor decreases your credit card limit as a result of the delinquency, your scores will drop even further, since this negatively impacts your credit utilization.

Once you’re around 180 days late (or six months), most creditors will close your account permanently and sell it to a debt collector, causing another hit to your scores. Then, even if you pay the debt collector off, the negative information won’t be removed from your credit reports ahead of the scheduled removal date.

Legal trouble

For debt that goes into collections, the debt collector can potentially decide to sue you for the money, especially if you owe a large amount. If they win the lawsuit, you could end up with a wage garnishment or have funds seized from your bank account.

How to Avoid Delinquency (and What to Do if You’re Already There)

To avoid the astronomical interest charges and credit damage that come along with delinquency, you’ll want to address the problem as early as possible. Depending on your status — whether you’re already late or you expect to be late soon — here are some options to consider when you can’t pay your credit card:

• Change your due date: Contact the creditor to see if you can change your monthly due date to a later date in the month. 
• Ask for help: Explain your situation to your creditor. If you can catch up on a missed payment right away (and you don’t usually make late payments) they may agree to reverse the late fee and/or the penalty rate. If you’re not able to catch up, ask if you’re eligible for a payment plan or a hardship payment option.
• Talk to a credit counselor: Reach out to an NFCC-certified credit counseling agency to get professional guidance on your options for debt relief. Your counselor can review your budget and offer personalized advice. Depending on the specifics, they might offer to enroll you in a Debt Management Plan (DMP) to bring down your credit card payments, or help you explore the possibility of bankruptcy.
• Borrow money: Depending on the condition of your credit scores, you might be able to qualify for a personal loan* to help cover your credit card payments. While going into more debt is not ideal, moving debt to a loan can be a useful strategy since personal loans have far lower interest rates than the average credit card. Alternatively, you might ask a loved one if they can lend you the funds.

The Recovery Path

The consequences for being delinquent on a credit card are severe, but there are ways to speed up your recovery from the incident. 

When it comes to dealing with debt after a delinquency, it’s best to use credit cards with caution. Avoid putting any purchase on a card that you can’t pay off within 30 days. For emergency situations, only use your credit card when you have no other way to pay for a necessity. 

When it comes to the damage done to your credit scores, know that it won’t last forever. The damage is most severe right after the delinquency takes place, but as time passes, the negative marks on your credit reports have less impact. Additionally, you can speed up the process of improving your credit by adding new, positive information to them, on-time payments on your loans and credit cards.

*All personal loans made by WebBank.