What Happens If I Stop Paying My Credit Cards?
Credit score decreases, wage garnishment and more — this is what could happen if you stop paying your credit cards.
Contributing Writer at Tally
November 19, 2021
Credit cards can be helpful, but they can also get you into big financial trouble if you overspend or go over your limit. In some cases, the debt can feel insurmountable, and your response may be to give up and stop paying your credit cards.
This could leave you wondering: What happens if I stop paying my credit cards? We’ll cover what can happen when you take this approach and suggest a few financially responsible alternatives.
If you’re drowning in credit card debt, throwing in the towel and stopping all payments may seem like a way out. While this may provide immediate financial relief, there are serious consequences.
Late fees and other penalties
When you initially stop paying on your credit cards, you’ll start to see late payment fees and other penalties added to your debt.
When you’re past due on your last credit card statement, your credit card company can charge a late fee to your credit card account. The credit card issuer can charge you up to a $28 late fee the first time you’re late, but that fee can rise to $39 if you’re late any other time within six months.
If your payment reaches 60 days late, the creditor can start charging a penalty annual percentage rate (APR), or interest rate. The penalty APR can reach up to 29.99%.
Once you pass your due date, you may start receiving collection calls. Initially, you might hear directly from the credit card company. The credit card company has a vested interest in keeping your business and often has options they will offer to get you back on track.
After a period of time, generally 120 days, the credit card company may bring in an outside debt collector to collect on its behalf. These specialists will offer many of the same options as the credit card company, but they may collect more aggressively — additional calls, stronger verbiage, etc.
Once your account has become seriously delinquent and the credit card company deems it uncollectible, it may sell the debt to a collection agency for far less than you owe and charge off the difference.
Credit score collapse
While the late fees, penalties and collection calls are a hassle, the big hits come to your credit report and score. Not paying your credit cards will impact your credit in several ways.
The first place your credit will take a big hit is your payment history, which accounts for 35% of your FICO score.
You won’t see a negative mark on your payment history immediately after you stop paying your credit card bills. The credit card company must wait until your missed payment is at least 30 days late before it can report your account as delinquent to the three major credit bureaus: Equifax, Experian and TransUnion.
While the exact number of points your credit score will drop due to a late payment depends on many factors, FICO’s example scenarios show up to an 83-point drop at the 30-day mark. The credit hits could continue with time, as FICO’s example shows up to a total credit score decrease of 133 points after 90 days.
The credit score losses due to your negative payment history will continue over the months and years.
Collections accounts also play a role in your FICO credit score. While there is no indication just how much they can impact your score, they will likely cause more harm if they’ve been reported recently.
Rising account balances
With each passing month you don’t make your credit card payments, your account balance rises due to late fees and interest. Over time, this can add up and push your credit utilization ratio — your credit card balances relative to your credit limits — higher.
Your credit utilization ratio makes up 30% of your FICO score, and it can cause significant credit score decreases if it gets too high.
If you stop paying your credit cards for too long and have a high enough balance, the credit card company might sue you for being in default.
Generally, credit card companies will only sue in very specific situations where certain criteria are met. Some of these criteria are:
You’ve been delinquent for at least 180 days
The credit card company believes it has no other options
The outstanding balance justifies a lawsuit, typically at least $1,000
Even with those criteria met, credit card companies are wary about suing because litigation is costly, the judge may rule against the credit card company and the statute of limitations on debt collection may have passed.
If the credit card company successfully sues you, a judge could force wage garnishment to repay the unpaid debt.
Alternatives to not paying off credit cards
You can avoid the temptation to stop paying your credit cards with several alternatives that can help reduce your monthly payment, accelerate your debt repayment and alleviate some stress.
With a debt consolidation loan, you might be able to pay off all your credit cards with one lower-interest loan. Not only could the lower interest save you money, but by consolidating your credit cards into one loan, you’ll only have one payment per month instead of many.
Debt repayment plan
You can also accelerate your debt repayment with a firm plan in place. Two debt payment plans that work well are the debt avalanche and debt snowball methods.
With the debt avalanche, you apply all your extra cash to the debt with the highest interest rate while making the minimum monthly payments on the remaining debt payments. Once you pay off this debt, start applying all your extra money each month to the debt with the next-highest interest rate while making the minimum payments on all your other debt.
Repeat this process until you pay off all your debts.
With the debt snowball, you apply all your extra cash to the debt with the lowest balance while making the minimum monthly payments on the remaining debt payments. Once you pay off this debt, apply all your extra money each month to the debt with the next-lowest balance while making the minimum monthly payments on all your other debt.
Continue this process until you’ve paid off all your debts.
Line of credit
You can also take out a line of credit, such as a home equity line of credit (HELOC) or a personal line of credit. A line of credit is a revolving credit — one you can use multiple times within the draw period as long as you haven’t reached the credit limit.
With a HELOC, you use the equity in your home — the difference between your home’s value and the mortgage on it — to secure a line of credit. You can then use the line of credit to pay off all your debt.
A personal line of credit works essentially the same way as a HELOC, but no asset is securing the loan.
Both lines of credit will generally offer you lower interest rates than you pay on your credit cards.
Avoid financial ruin
When you stop paying your credit cards, you could be thrusting yourself into a downward financial spiral that’s hard to overcome — beginning with late fees and eventually growing to significant credit score damages and potential litigation. No matter how you slice it, not paying your credit card bills is a poor financial decision.
Instead of not paying your debts, you can try an alternative solution, such as debt consolidation, a debt repayment plan or a line of credit. These options can help you get out of debt sooner and save on interest along the way.
If a line of credit seems like the route for you, Tally† can help. Our app helps you manage your credit card payments, and we offer a lower-interest line of credit, allowing you to efficiently pay off higher-interest credit cards.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.