What Happens If I Don’t Pay My Credit Card?

When credit card payments become unmanageable, many wonder about the consequences of non-payment. Understanding the potential outcomes is important for anyone facing such a situation. Unpaid credit card debt can lead to a range of financial and legal repercussions, impacting financial standing. These consequences escalate, affecting credit, finances, and assets.

Initial Financial and Credit Impact

Missing a credit card payment results in immediate financial penalties. Creditors commonly assess a late fee, averaging around $30.50 for a first occurrence and increasing to $41 for subsequent late payments within six months. These fees add to the outstanding balance.

Beyond late fees, a missed payment can trigger a penalty Annual Percentage Rate (APR). This higher interest rate applies if a payment is 60 days or more overdue, though some cards may impose it after 30 days. Penalty APRs significantly increase the interest charged, potentially reaching rates as high as 29.99%. Federal regulations require creditors to provide at least 45 days’ notice before applying a penalty APR.

The most immediate consequence involves one’s credit score. Payment history is the largest factor in credit scoring models, accounting for about 35% of a FICO score and 40% of a VantageScore. A missed payment is reported to the major credit bureaus once it is 30 days past due, though some creditors may wait until 60 days. Even a single late payment can cause a substantial drop in credit scores, by 100 points or more for those with high scores.

The longer a payment remains overdue, the more severe the negative impact on the credit score becomes. Payments reported as 60 or 90 days late incur progressively greater damage. These negative marks remain on a credit report for up to seven years from the date of the initial missed payment. A lower credit score can lead to higher interest rates on future loans, such as for a car or home, and can make it difficult to obtain new credit. It can also result in higher premiums for auto and homeowners insurance.

Creditor Collection Practices

As credit card payments continue to be missed, the original creditor will intensify their collection efforts. This begins with communications, including phone calls, letters, and emails. The frequency and urgency of these contacts increase as the debt ages. During this phase, the creditor might offer to negotiate a payment plan or a settlement to recover some of the outstanding amount.

If payments remain delinquent, the credit card account may be suspended or closed. Account closure means the cardholder can no longer make new purchases with that credit line. This action further restricts access to credit and signals to other lenders that the account is in distress.

A “charge-off” occurs when the creditor deems the debt uncollectible and writes it off as a loss in their accounting records. This typically happens after 120 to 180 days of continuous non-payment. A charge-off is an internal accounting classification and does not mean the debt is forgiven; the cardholder still legally owes the money.

A charge-off is reported to credit bureaus and appears as a derogatory mark on the credit report, harming the credit score. This negative entry can remain on the credit report for up to seven years from the date of the first missed payment. After a debt is charged off, the original creditor often sells the debt to a third-party debt collection agency. This sale occurs for a fraction of the outstanding balance, transferring collection rights to the new agency.

Legal Action and Debt Enforcement

When credit card debt remains unpaid, either the original creditor or the debt buyer may pursue legal action. The process begins with the debtor being served a summons, which is a formal notice of a lawsuit. It is important to respond to this summons, as failing to do so can result in a default judgment against the debtor.

If the creditor or debt buyer wins the lawsuit, or if a default judgment is entered, the court issues a judgment. This court order grants the creditor various methods to enforce collection. These post-judgment enforcement actions can include wage garnishment, bank levies, and property liens.

Wage garnishment involves a court order directing an employer to withhold a portion of the debtor’s earnings and send it directly to the creditor. Federal law limits the amount that can be garnished for consumer debts to 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage, whichever is less.

A bank levy allows a creditor to obtain a court order to seize funds directly from the debtor’s bank accounts. Once the bank is notified of the levy, it must freeze funds up to the amount owed. After a waiting period, the bank releases these funds to the creditor, and the debtor may not receive advance notice.

In some situations, a judgment can result in a property lien being placed on real estate owned by the debtor. A property lien is a legal claim against the asset, which does not immediately result in the loss of the home. However, it can make selling or refinancing the property difficult until the lien is satisfied. Credit card companies are less common to pursue such actions for smaller debts due to the time and expense involved.