What Does It Mean to Default on a Credit Card?

A credit card default represents a failure to meet financial obligations, meaning a cardholder has not adhered to their credit agreement. This status is formally declared by the creditor and indicates a breakdown in the cardholder’s ability to manage their debt.

Understanding Credit Card Default

Credit card default occurs when a cardholder fails to make required minimum payments for an extended period, leading the credit card issuer to formally declare the account in default. This status is distinct from being merely delinquent, which happens after a single missed payment. While delinquency might begin after 30 days past due, default typically occurs after a much longer period of non-payment.

Most commonly, an account is declared in default when payments have been missed for 180 days or more, approximately six consecutive months. Some creditors may consider an account in default after 60 to 270 days past due, depending on their policies. Other triggers for default can include breaching credit card agreement terms, such as exceeding the credit limit or filing for bankruptcy. Once an account defaults, the creditor often closes the account and may write off the debt as a loss for accounting purposes.

Consequences for Cardholders

Defaulting on a credit card can lead to lasting negative impacts for the cardholder. One immediate consequence is a drop in credit scores. A single missed payment can cause a credit score to fall by 60 to 100 points, and a default will inflict greater damage, making it difficult to obtain future credit or loans.

A credit card default remains on credit reports for an extended period, typically seven years from the date of the default. This long-term notation can hinder access to new credit, mortgages, or certain employment opportunities. Beyond credit score damage, defaulting often triggers collection activities, including frequent calls and letters from the original creditor or third-party collection agencies to whom the debt may be sold.

If collection efforts are unsuccessful, creditors or debt buyers may pursue legal action. This can result in a lawsuit, and if the court rules in their favor, a judgment may be issued against the cardholder. Such a judgment can lead to wage garnishment, where a portion of the cardholder’s paycheck is legally withheld to repay the debt, or bank levies, which involve seizing funds directly from bank accounts. Defaulting can also result in increased costs, including accelerated interest rates, accumulating late fees, and collection fees, which further inflate the amount owed.

Steps to Address or Prevent Default

Individuals facing financial difficulty can take steps to prevent a credit card default or address an existing one.

Preventing Default

Preventing default often begins with timely communication. Contacting the credit card issuer before missing payments can open discussions for potential hardship programs or payment plans. Creating a budget and managing expenses effectively can help prioritize payments and allocate funds towards debt obligations.

Addressing Default

If a default has already occurred, or is imminent, negotiating with creditors is an option.

• Negotiate a payment plan, a reduced interest rate, or a debt settlement, which involves paying a lump sum less than the full amount owed.
• Seek assistance from non-profit credit counseling agencies. These agencies can help individuals create a budget, offer advice on managing debt, and may facilitate a Debt Management Plan (DMP). A DMP involves the agency negotiating with creditors to lower interest rates and consolidate payments into a single monthly amount, typically repaid over three to five years.
• Consider debt consolidation through personal loans or balance transfer cards to simplify payments and potentially secure a lower interest rate. Credit score requirements may limit options post-default.
• As a last resort, consider bankruptcy. Chapter 7 bankruptcy can discharge most unsecured debts like credit card debt. Chapter 13 involves a repayment plan over three to five years, often discharging remaining unsecured debt at the end. Both types of bankruptcy have long-lasting impacts on credit.