What Happens When You Default on Credit Cards?

When credit card payments are no longer made, a series of financial and legal consequences can unfold. Credit card default occurs when an individual fails to make the required minimum payments on a credit card for an extended period. This typically happens after 180 days or approximately six consecutive months of missed payments, marking a severe stage in the debt collection process.

Immediate Consequences of Missed Payments

Missing a credit card payment initiates immediate repercussions from the card issuer. The first financial penalty is typically a late fee, which can average around $32, though a new rule may cap this at $8 for large issuers. This fee is usually applied shortly after the payment due date.

Beyond the initial fee, a missed payment can trigger an increase in the Annual Percentage Rate (APR). This higher rate, known as a penalty APR, can be applied if a payment is 60 or more days late, or if other terms are violated. Penalty APRs can reach as high as 29.99%, significantly increasing the cost of carrying a balance.

Credit card issuers also begin communicating with the cardholder after a missed payment. Initial outreach may include reminder notices via email, text, or mail, followed by more frequent phone calls. These communications notify the cardholder of the delinquency and encourage prompt payment, often offering options to resolve the missed payment.

Impact on Your Credit Report

Missed credit card payments directly impact a consumer’s credit report and overall credit score. Creditors typically report missed payments to the three major credit bureaus—Experian, Equifax, and TransUnion—once an account is 30 days past due. Even a single late payment can significantly impact a credit score, potentially by 100 points or more, especially for individuals with a strong credit history.

As the delinquency continues, negative marks on the credit report become more severe, progressing from 30-day to 60-day, and then 90-day delinquencies. Each subsequent missed payment further damages the credit score and signals a higher risk to potential lenders. These derogatory marks indicate a failure to meet financial obligations.

If payments are not made, typically after 180 days, the credit card account will be classified as a “charge-off.” A charge-off means the original creditor has written off the debt as a loss for accounting purposes, though the debt remains legally owed. Both delinquencies and charge-offs remain on a credit report for up to seven years from the date of the first missed payment, making it difficult to obtain new credit or favorable interest rates.

Creditor Collection Procedures

Following a charge-off, the credit card issuer escalates efforts to recover the outstanding debt. Initially, the original creditor’s internal collection department may continue contact, attempting to negotiate payment arrangements. These efforts typically last for about 30 to 90 days after the initial delinquency, aiming to resolve the debt.

If internal efforts prove unsuccessful, the original creditor will formally “charge off” the account. This accounting action indicates the debt is deemed uncollectible from their perspective, but it does not absolve the cardholder of the obligation to pay. After charging off the debt, the original creditor often sells the charged-off account to a third-party debt collection agency for a fraction of its face value.

Once a debt is sold, the collection agency assumes ownership and the right to pursue the full amount owed, plus any applicable interest and fees. These agencies attempt to collect the debt through various communication methods, including phone calls and letters. Debt collectors are governed by the Fair Debt Collection Practices Act (FDCPA), which prohibits abusive, deceptive, and unfair collection practices. Consumers also have the right to request validation of the debt from the collection agency.

Potential Legal Action

When collection efforts do not result in payment, legal action becomes a potential next step to recover defaulted credit card debt. A credit card issuer or debt buyer may file a lawsuit against the cardholder to obtain a judgment for the outstanding amount. This process typically begins with a summons and complaint, formally notifying the individual of the lawsuit and claims.

If a judgment is awarded in favor of the creditor, this legal ruling establishes the debt and grants the creditor rights to enforce collection. A judgment can empower the creditor to pursue various methods of debt recovery, including wage garnishment, bank levies, or property liens. These enforcement actions compel payment when voluntary efforts have failed.

Wage garnishment involves a court order directing an employer to withhold a portion of an individual’s earnings and send it directly to the creditor. Federal law limits how much can be garnished, typically restricting it to the lesser of 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage. Certain federal benefits, such as Social Security, are protected from garnishment.

Another enforcement method is a bank levy, also known as an account freeze, where a creditor obtains a court order to seize funds directly from an individual’s bank account. This can result in funds being frozen up to the judgment amount. Additionally, a property lien may be placed on real estate owned by the debtor, asserting a legal claim against the property. This lien could prevent the property from being sold or refinanced until the debt is satisfied.