What Happens If You Don’t Pay a Credit Card?

When credit card payments are not made, a series of financial and legal consequences can unfold. This article details the potential outcomes that arise when credit card debt goes unpaid, from initial penalties to formal debt resolution processes.

Initial Financial Penalties

Missing a credit card payment triggers immediate financial penalties. A late fee is applied once a payment is not received by its due date. These fees are capped by federal regulations, such as the CARD Act, and cannot exceed the minimum payment due for that billing cycle.

Credit card issuers may also apply a penalty Annual Percentage Rate (APR) to the account. This higher interest rate activates after an account becomes 60 days past due. The penalty APR can be significantly higher than the standard purchase APR, applying to new purchases and sometimes to the existing outstanding balance. This causes the debt to grow faster, making it more challenging to repay the principal.

The accumulation of late fees and a higher penalty APR can quickly compound the debt. The increased interest rate means a larger portion of any payment goes towards interest rather than reducing the principal. This makes it difficult for cardholders to catch up, leading to a spiraling increase in the total amount owed.

Impact on Credit Standing

Missed credit card payments have a significant negative impact on an individual’s credit standing. Credit card issuers report account activity to the major credit bureaus. A payment reported as 30 days past due is the first negative mark on a credit report, leading to an immediate decline in credit scores. The score drop increases with the number of days the payment is late and the frequency of missed payments.

As payments continue to be missed, the credit score degrades further. An account can be reported as 60, 90, or 120 days delinquent, with each report causing more damage. A “delinquency” marks the account as behind on payments, signaling increased risk to lenders. These negative marks remain on a credit report for seven years from the date of the missed payment.

A “charge-off” typically occurs when an account becomes 180 days past due. At this point, the creditor considers the debt uncollectible and writes it off as a loss. While charged off, the cardholder is still legally obligated to repay it. A charge-off is a major derogatory mark on a credit report and can significantly lower credit scores, remaining on the report for seven years. A damaged credit score has broad implications for future financial activities. It can make it challenging to obtain new loans, such as mortgages or auto loans, and any approved credit may come with higher interest rates. A low credit score can also impact the ability to rent an apartment, secure certain types of insurance, or affect employment opportunities.

Debt Recovery and Legal Proceedings

Creditors escalate efforts to recover unpaid debt, moving from internal collection activities to external agencies and potential legal action. The original credit card issuer first attempts to collect the debt through phone calls, letters, and emails.

If internal efforts are unsuccessful, the original creditor may sell the debt to a third-party debt collection agency. Debt collectors are governed by federal laws, such as the Fair Debt Collection Practices Act (FDCPA), which outlines permissible communication methods and prohibits harassment. Collectors may contact the cardholder by phone and mail, attempting to negotiate payment.

If collection efforts do not result in payment, the credit card issuer or debt collector may file a civil lawsuit against the cardholder to obtain a judgment. This usually occurs when the debt amount is substantial and collection attempts have been exhausted. The legal process begins with the filing of a complaint with the court and serving the cardholder with a summons, which formally notifies them of the lawsuit and requires a response within a specified timeframe. Failure to respond can result in a default judgment against the cardholder.

Should the court rule in favor of the creditor, a judgment is issued, legally confirming the cardholder’s obligation to pay the debt. With a judgment, creditors gain additional tools to collect the money. These can include wage garnishment, where a portion of the cardholder’s earnings is directly withheld by their employer and sent to the creditor. Federal law limits wage garnishment to 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage, whichever is less. Other collection methods based on a judgment may involve bank account levies, allowing the creditor to seize funds from the cardholder’s bank accounts, or placing liens on real property, which can complicate selling or refinancing the property until the debt is satisfied.

Formal Debt Resolution Processes

When credit card debt becomes unmanageable and severely delinquent, several formal mechanisms and processes may be considered to address the situation. One such option is debt settlement, where the cardholder negotiates with the creditor to pay a lump sum that is less than the total amount owed. This negotiation can be conducted directly by the cardholder or through a debt settlement company.

While settling debt can provide relief from the full balance, the “forgiven” portion of the debt, typically amounts over $600, may be considered taxable income by the Internal Revenue Service (IRS), and the cardholder may receive a Form 1099-C (Cancellation of Debt). Additionally, settling a debt for less than the full amount is often noted on the credit report, which can negatively impact credit scores.

Another structured approach is a Debt Management Plan (DMP), typically offered by non-profit credit counseling agencies. In a DMP, the agency works with the cardholder and their creditors to consolidate monthly payments into a single payment made to the agency, which then distributes funds to the creditors.

Creditors often agree to reduce or waive interest rates and fees for cardholders enrolled in a DMP, making the debt more manageable. A DMP is not a loan; instead, it is a structured repayment plan designed to help cardholders pay off their unsecured debts over a period, usually three to five years.

For individuals facing overwhelming debt, bankruptcy provides a legal pathway for relief. Chapter 7 bankruptcy, also known as liquidation bankruptcy, allows for the discharge of most unsecured debts, including credit card debt, for eligible individuals who meet certain income requirements, often determined by a “means test”. While it can provide a fresh financial start, Chapter 7 bankruptcy remains on a credit report for up to 10 years and can significantly impact future borrowing ability.

Alternatively, Chapter 13 bankruptcy, or reorganization bankruptcy, allows individuals with regular income to repay all or a portion of their debts over a period of three to five years through a court-approved payment plan. Unlike Chapter 7, Chapter 13 allows debtors to keep their property while repaying their creditors. This type of bankruptcy also remains on a credit report for seven years. Both forms of bankruptcy require legal counsel and involve court proceedings, representing a significant legal and financial step to address unmanageable debt.