What Happens After Defaulting on a Credit Card?
A default is bad news, but fortunately, there’s plenty you can do to correct the situation.
September 12, 2022
Carrying a credit card requires discipline. Like the strictest teacher in school, credit companies don’t give you much margin for error. If you miss your credit card payments, you’ll be hit with hefty interest charges and late fees. The consequences are even worse if you end up defaulting on a credit card.
Let’s look at exactly what it means to default, what you can expect if it happens and how to improve your situation if you’re already in default.
What is a default?
When you’re approved for a credit card, you must sign a cardholder agreement containing a set of rules you agree to uphold before you can access the credit. One of these terms is that you’ll make on-time monthly payments of at least a specified minimum amount.
If you repeatedly don’t pay at least that minimum amount, your credit card company may try to contact you and collect payment. Then, after a certain period of time, lenders assume that you don’t plan to make any payments. In the case of credit card companies, this usually happens after 180 days, but it can vary.
At this point, your account is considered “in default.” As a result, the credit card issuer considers the loan to be a bad debt (meaning it’s considered uncollectible).
By now, the credit card company will have given up trying to reach you to arrange for payment. But this doesn’t mean you can relax or that you don’t have to worry about the payments — instead, it means you’ll have to face some unpleasant consequences.
What happens after defaulting on a credit card?
Defaulting on a credit card is never a good thing, but the exact form it takes may vary depending on how much debt you have and the policies of your creditor. Below are likely outcomes.
Your account will be sent to collections
After a credit card company determines that you’ve defaulted on your credit card, they’ll almost always close your account and transfer the debt to a collection agency. This is a company that specializes in collecting payments from debtors.
At this point, you deal directly with the collection agency, which may include having to endure a barrage of irritating phone calls demanding prompt payments. The good news is that laws limit what debt collectors can do; for instance, they can’t “harass” you (e.g., by threatening violence or repeatedly making annoying phone calls) or contact you after 9 p.m. Still, it’s an unpleasant experience — and this is just the beginning.
You could face legal action
If a creditor is determined to recoup debt payments, they may sue you using a debt collection lawsuit. Generally, this means you’ll have no choice but to respond and go to court. The only exceptions are if the details of the debt stated in the lawsuit are inaccurate (e.g., it specifies the wrong amount) or if their time to sue has expired (state laws specify a statute of limitations ranging from three to six years).
Your wages could be garnished
If a court determines you’re responsible for the debt, it has various methods at its disposal to ensure the creditor gets the funds they’re owed. One of the most common is wage garnishment, which means your employer automatically offloads a portion of your paycheck to your creditor until the debt is satisfied.
Your credit score will decrease
Wage garnishment and going to court might be unpleasant and take a long time, but a decrease in your credit score has both an immediate and long-term impact on your life.
Once you default, your creditor will report it to the three major credit bureaus: TransUnion, Experian and Equifax. Each credit bureau has slightly different methods for calculating credit scores, but on-time payments are important to all three, so something as extreme as a default has a severe negative effect on your record.
Defaults have the potential to lower your credit score by hundreds of points, making it more difficult for you to get credit or take out a mortgage in the future. Since employers can see your credit report, it can occasionally be a barrier to getting a job, but this is unusual and often only applies to certain jobs in the financial sector.
Your interest rate will increase
After you’ve missed your credit card payments for 60 days, your interest rate can increase dramatically. The higher rate can make your debt grow even faster due to compounding interest (when the interest you owe starts accumulating interest).
It might seem unfair, but this happens because you’re now considered to be a more risky borrower and lenders want to be compensated for taking the risk of extending credit to you.
Your credit limit will decrease
For similar reasons, the amount of money you can borrow on credit — that is, your credit limit — may drop. This lower number poses additional implications, such as increasing your credit utilization rate and, therefore, lowering your credit score further.
How long does a default stay on your credit report?
Defaulting on a credit card is a costly mistake that isn’t easy to fix. Evidence of a default lingers on your credit report for seven years before it’s wiped away completely, even if you pay off the debt. It may be even longer if you ignore the consequences outlined above and don’t take action to get out of default (we’ll outline how to do this below).
A default on your credit record could be the determining factor that prevents you from getting a mortgage, renting an apartment or getting a new car in the short term — even if you turn things around by earning a great salary and don’t take on any more debt.
How do you overcome a default?
Reading about the possible consequences of defaulting on a credit card can be disheartening, but there’s plenty you can do to turn things around.
As they say, prevention is better than a cure: It’s best to ensure a default on your credit card never happens in the first place by always paying your credit card bills on time. Ideally, you should pay off your balance in full each month, but always making the minimum payment will at least prevent you from defaulting.
Some say you can avoid the consequences of debt if you evade your creditors long enough. As mentioned earlier, creditors can only sue you during the time frame specified by the statute of limitations. After this, you’ll still have the debt on your account, but you can no longer be taken to court. However, it’s best to avoid this high-risk tactic since you’re unlikely to evade the courts for years on end.
Instead, consider one of these three options:
1. Settle the debt
The best way to get rid of your default is simply to pay off your debt. Naturally, if you ended up defaulting in the first place, chances are that you might not have the funds to pay back the money you borrowed.
You could try to negotiate payment of a lesser amount with the creditor — it’s better for them to receive a reduced amount than nothing at all. However, lenders will likely not be impressed by an offer of less than 40% of the debt owed, and a common range to offer creditors is 50% to 70% of what you originally owed.
One option you may hear about is negotiating a pay-for-delete, which means the creditor agrees to remove the delinquency from your credit report in exchange for an immediate payment (which is lower than the full value of the debt). However, the legality of this is a gray area; it’s not specifically prohibited but those in the industry don’t see it as a legitimate or ethical choice. Therefore, it’s best to choose an alternative.
2. Establish a payment plan
If negotiation isn’t possible, you may be able to work with your creditor to establish a payment plan, which can involve small monthly payments or lower interest rates to make it easier for you to pay it back. If there’s a reason for your reduced spending power (meaning you have less income than when you took on the debt) such as a job loss, they may also be able to put you on a hardship program.
Alternatively, nonprofit credit counseling agencies can help people who are trapped in debt get back on track by creating tailored debt management plans for them. The government has published a list of approved agencies you can contact to find out more.
3. File for bankruptcy
Depending on how extreme your debt is, you can choose to file for bankruptcy. You’ll need to work with an attorney and go through court, but if everything’s approved, you won’t have to pay the debt back.
But be warned: A bankruptcy clings to your credit score for seven to ten years, depending on the route you choose. This isn’t a good idea if you’re hoping to take out a mortgage or something similar within that time frame, but it can be the right choice for some people since the record of bankruptcy will be completely wiped away in time.
Deal with the default and get your financial life back on track
Defaulting on a credit card is one of the biggest financial mistakes you can make. If you can, save yourself from years of complications by handling your credit card debt responsibly, always making on-time payments and steering clear of credit card default. But there’s no need to despair if you’re already in default — it doesn’t last forever, and you can take action to mitigate the situation, such as by setting up a payment plan.
If you need some assistance to keep your payments on track and stay out of default, consider the Tally†credit card repayment app. The app combines your higher-interest credit card debt into a lower-interest line of credit and automates payments so you can get your personal finances under control.
†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 to $300.