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What happens if you default on your credit card?

A default means bad news for any debtor.

Morgan Sliff

Contributing Writer at Tally

September 10, 2019

Credit cards demand a lot of responsibility. They’re kind of like the strictest teacher in school — if you’re a few minutes late to your seat, consider yourself bound for detention.

The same rules apply if you miss or are late on credit card payments. Credit cards are a highly influential element for your credit score, which acts as a portal for nearly anything you want to do that involves obtaining loans, a roof over your head and much more. 

When you miss a payment, your credit score plummets. But if you miss more than a few payments, you run the risk of stepping into one of the worst situations that can happen to a debtor: a default.

What is a default?

When you’re approved for a credit card, the agreement contains a set of rules that you promise to uphold. One is making on-time payments that are more than or equal to a specified minimum amount.

If you fail to make any payments on your balance for 180 days (six months), credit card companies will assume that you do not plan to make future payments and considers you to be in default.

What happens after a default?

A default means bad news for any debtor. All or some of the following scenarios could happen if you default on a credit card. These circumstances are swayed by the amount of the debt you have and the policies of your creditor.

Account sent to collections

After a credit card company determines that you’ve defaulted on your credit card, they may close your account and transfer your debt to a collection agency. When they do this, your balance is no longer associated with the credit card company, and you must deal directly with the collection agency. This may include having to endure a barrage of irritating phone calls demanding prompt payments.

Some creditors may be rather tenacious when it comes to a debt owed. If they are seeking an expeditious route, they could choose to file a County Court Judgement against you.

Since debt is straightforward and usually not up for argument, the only thing you can really do in court is show up and try to prove the creditor does not possess the authority to sue you. This mainly happens only in the case where your debt exceeds your state’s statute of limitations. And even if you pay off your debt, the effects stay with you for a long time; CCJ will be attached to your account for six years.

Wages garnished

If a court determines you’re responsible for the debt, you can have a number of scenarios happen that will take money from your pocket. One common instance is wage garnishment. Your wages could be cut, which means your employer has to offload a portion of your paycheck to your creditor until the debt is satisfied.

Credit score decrease

A default will be reported to the three major credit bureaus: TransUnion, Experian and Equifax. On-time payments are the highest factors affecting your credit report, and by entering into default, this means you have not made timely payments for quite a stretch. Defaults have the potential to lower your credit score by hundreds of points, making it more difficult for you to rent, buy a house, get a job or more.

Interest rate increase

After you’re 60 days past due on your payments, your interest rate can increase dramatically. And since you’re already behind on payments, the higher rate can make your debt grow even more.

Credit limit decrease

Defaulting on a credit card makes you look especially risky to your creditor. As such, they may want to lessen their own risk by limiting the amount of money to which you have access. If you default on a credit card, you may see your credit limit decrease. This lower number poses additional implications, such as increasing your credit utilization rate and lowering your credit score.

How long does a default stay on your credit report? 

Defaulting on your credit card is disproportionately bad news for your future self. Evidence of default will linger on your credit report for six years from the date of default, whether or not the debt is paid. 

In the years to come, a default can be the sole indicator that prevents you from getting a mortgage, renting an apartment, getting a new car and much more — even if the future you makes enough money to otherwise qualify.

In some cases, employers even take your credit score into consideration before hiring. If the hiring party uncovers a default, it might cost you employment. Moreover, if your account is sent to collections, and you don’t pay back the default, the default can remain with you for even longer.

How do you overcome a default? 

The best way to overcome a default on your credit card is to make a payment and avoid it entirely before it happens. And if you pay your entire balance, you can also try to negotiate a pay-for-delete, where the creditor agrees to remove the delinquency from your credit report in exchange for immediate payment. If this isn’t possible, you have a few other options:

Settle the debt

Try to negotiate payment of a lesser amount with the creditor. Some lenders will be lenient with the amount owed and will settle; others won’t. One thing to note: lenders will likely not bat an eye at any offer less than 40% of the debt owed. A common range to offer creditors is 50-70%, but an accepted consolidation depends upon the creditor.

Ask reporting agencies to list an explanation

Creditors may be more understanding if there is a reason for your debt, such as an unforeseen illness or a death in the family. Talk to agents at Experian, TransUnion and Equifax to explore the possibility of listing a reason for the default.

File bankruptcy

Depending on how extreme the debt is, you can choose to file for bankruptcy. But be warned: A bankruptcy clings to your credit score for 7 to 10 years.

Wait it out

Even if a default remains on your credit report, a few years may be all that is needed for lenders to decide that you’re trustworthy enough for a loan again. 

Of all the factors affecting your credit score, a default is one of the worst. Save yourself from years of complications by handling your debt responsibly, making on-time payments, and steering clear of credit card defaults.