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Dealing with the aftermath of a financial rough patch can be stressful and confusing. You may be drowning in paperwork and have a lot of difficult questions running through your mind.
What should you do if you ended up in default on a credit card bill because you were unable to pay it?
The Dreaded Default: What Happens When You Can’t Pay Your Credit Card Bill?
Life throws curveballs. Sometimes, those curveballs come in the form of unexpected expenses, job loss, or medical emergencies leaving you struggling to keep up with your financial obligations including your credit card bills. If you find yourself unable to make your minimum payments, you may eventually default on your credit card.
But what exactly does “defaulting” mean, and what are the consequences? More importantly, is it worth paying off a default, even though it will remain on your credit report for seven years?
Understanding Default and Its Impact on Your Credit Score
A default occurs when you fail to make your minimum credit card payment for a certain period, typically 180 days. Once you default, the following consequences come into play:
- Negative Impact on Credit Score: A default can significantly lower your credit score, making it harder to qualify for loans, mortgages, and even employment in certain cases.
- Late Fees and Penalties: You’ll be charged hefty late fees and penalties, further increasing your debt.
- Collection Agencies: The credit card company may sell your debt to a collection agency, which will aggressively pursue payment, often resorting to harassing phone calls and legal action.
- Wage Garnishment: In extreme cases, your wages may be garnished to satisfy the debt.
- Lawsuits and Judgments: The creditor may sue you and obtain a judgment against you, which could lead to asset seizure.
So, Should You Pay Off a Default?
Even though a default will show up on your credit report for seven years, there are still a few reasons why paying it off can be advantageous:
- Stops Further Damage: Paying off the debt halts the accumulation of late fees, penalties, and interest, preventing your debt from spiraling out of control.
- Improves Credit Score: Although the default will remain on your report, paying it off demonstrates to creditors that you’re taking responsibility and working towards resolving the issue. This can help improve your credit score over time.
- Avoids Collection Agencies and Legal Action: Paying off the debt directly to the creditor prevents it from being sent to collections, saving you from the stress and hassle of dealing with collection agencies and potential legal action.
- Peace of Mind: Paying off a debt, even a defaulted one, can provide significant peace of mind and reduce the financial and emotional burden it carries.
Strategies for Recovering from a Default
If you’ve defaulted on a credit card, don’t despair. Here are some steps you can take to recover and rebuild your credit:
- Contact Your Creditor: Reach out to your credit card company and explain your situation. They may be willing to work with you to create a repayment plan or offer a settlement option.
- Develop a Budget and Stick to It: Create a realistic budget that accounts for your income and expenses, and stick to it diligently. This will help you avoid further debt and allocate funds towards paying off your default.
- Prioritize Debt Repayment: Make paying off your defaulted debt a top priority. Allocate any extra income towards reducing your outstanding balance as quickly as possible.
- Explore Debt Consolidation Options: Consider consolidating your debt into a lower-interest loan or balance transfer card. This can help you save money on interest and streamline your repayment process.
- Seek Credit Counseling: If you’re struggling to manage your debt, consider seeking help from a reputable credit counseling agency. They can provide guidance and support in developing a debt management plan and negotiating with creditors.
Remember, recovering from a default takes time and effort. You can progressively repair your credit and get past this financial setback by being proactive, handling your money sensibly, and proving that you are committed to repaying the loan.
Additional Resources:
- NerdWallet: https://www.nerdwallet.com/article/credit-cards/credit-card-default-what-to-do
- Experian: https://www.experian.com/blogs/ask-experian/will-a-default-be-removed-if-paid/
Remember, paying off a default is not a quick fix, but it’s a crucial step towards financial recovery and rebuilding your credit. With dedication and responsible financial management, you can overcome this challenge and achieve your financial goals.
Options if you’ve already defaulted
Once you’ve defaulted on a credit card bill, you can proceed in a few ways:
Do nothing. You can choose to do nothing about your debt, but this is a bad idea. Eventually, the debt collector could sue you for what you owe. If they win the lawsuit, a judgment will be issued against you, and your wages could be garnished.
It’s crucial to understand that there is a time limit within which debt collectors can file a lawsuit against you before a statute of limitations prevents them from doing so. States have different deadlines, but even after they’ve passed, collectors can still attempt to collect from you; they just can’t take you to court.
Pay off the debt. If you can afford to do so, paying off the debt might be your best option. It will get the collector off your back, and you won’t have to worry about getting sued. Obtain documentation from the collector proving you are truly responsible for the debt if you decide to pay. They are required to provide it. Then, pay in full. If you make only a partial payment, the statute of limitations may be reset and your debt may be re-aged. Obtain a written confirmation from the collector stating that you are no longer carrying a balance with them after the payment clears.
Settle the debt. Your collector might be willing to accept a settlement for less than you owe if you are unable to make the entire payment. If an agreement can be reached, put it in writing before you send the money, and once you have paid, obtain a written statement attesting to your compliance. You will want evidence of the agreement and that your obligation was met, just in case the collector backs down.
Declare bankruptcy. This is a drastic move, but it is a way to keep your debt collector at bay. In the event that you are completely overwhelmed by your debt and there is no way you can make ends meet, speak with a lawyer and begin the bankruptcy process.
After you take this action, the collector will not be able to pursue payment from you until your bankruptcy case is adjudicated (provided that the debt you owe the collector is listed on your bankruptcy paperwork). If your debt is discharged by the judge, you’re no longer obligated to pay it.
What it means to default on a credit card
Your credit card issuer believes you won’t be making payments on it for at least 180 days after that. The issuer may now close your account, write off the amount owed as bad debt, and sell your account to a collections agency. This is something that they typically do.
Now your credit card issuer is out of the picture. Your debt belongs to a collector, and you’ll start getting flooded with phone calls asking you to pay the bill. Although you can send written notice asking them to stop calling you, and there are laws limiting what debt collectors can say and do when they contact you, you’ll still owe the debt. And if you don’t deal with it one way or another, you could get sued (see below).
Also, the default will be reported to the three major credit bureaus. Your credit report will bear the mark for a maximum of seven years, and your credit score will plummet.
In short, defaulting on a credit card bill has serious consequences. You should make it a priority to handle this matter as soon as you can.
Even if you rebuild your credit to the point where you can qualify for other cards, it’s possible that you won’t be approved for a credit card from that specific issuer again if you default on one. Issuers keep track of which customers have had debt charged off. Usually, they won’t disclose to the public what, if anything, would be required for them to approve a person who has previously fallen behind.
Why you should NEVER stress about defaulted debt
FAQ
Is there any point paying off a default?
What happens when you pay a defaulted account?
How much will my credit score go up when a default is removed?
What happens if you default on a payday loan?
The payday lender will attempt to collect on the loan. However, if the loan is in default, the lender can send the debt to a collection agency. A collection agency can report the default to the credit bureaus, impacting your credit score. A payday lender may also take you to court to collect the loan balance.
What does it mean if you default on a loan?
Here’s an explanation for Defaulting on a loan means that you’ve violated the promissory or cardholder agreement with the lender to make payments on time. Filing for bankruptcy, on the other hand, is a legal process that involves listing your debts and assets and finding a way to resolve the debts.
What happens if you default on a car loan?
When you default on an auto loan, the lender can repossess your vehicle. This means that they take possession of your car and sell it to try to cover the outstanding loan amount. Your lender’s policies and state laws determine how delinquent your payments must be before it considers your auto loan in default and begins the repossession process.
How can I avoid defaulting on a loan?
It is important to consider your budget and potential future expenses before taking out a loan to avoid defaulting. If you find yourself in default, options such as debt consolidation loans and credit counseling can help you get back on track. Loan default happens when you regularly miss your monthly loan payments for an extended period of time.