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

When credit card payments are not made, a series of escalating consequences can begin. Continued non-payment can lead to significant financial repercussions, ranging from immediate penalties to long-term damage to one’s financial standing and future borrowing capacity.

Immediate Repercussions of Non-Payment

Initial consequences manifest shortly after the due date. Issuers assess late fees if payment is not received by the deadline. As of early 2024, the average credit card late fee was around $32, though a new rule has capped this at $8 for large issuers, a change expected to take effect in May 2024. These fees are added to the outstanding balance, increasing the total amount owed.

Beyond late fees, agreements include provisions for a penalty interest rate, also known as a default APR. If a payment is missed, the issuer may apply this significantly higher interest rate to the outstanding balance. This elevated rate leads to rapid accumulation of interest charges, making it harder to reduce the debt.

A single missed payment, reported to credit bureaus once 30 days past due, can immediately affect credit scores. Payment history is a significant factor in credit scoring, so even one late payment can cause a noticeable drop. This initial negative mark remains on a credit report for up to seven years from the date of the delinquency.

Creditor Collection Activities

As non-payment continues (typically 60 to 180 days past due), the credit card issuer intensifies collection efforts. The process begins with internal collection activities, as the company attempts to contact the cardholder through calls, letters, and emails to recover the past-due amount. These communications serve as reminders and attempts to arrange payment.

Continued failure to make payments results in suspension or closure of the credit card account. Once an account is suspended or closed, the cardholder can no longer make new purchases or cash advances, cutting off access to that line of credit. This action prevents the debt from growing further through new spending.

A “charge-off” typically occurs after 120 to 180 days of continuous non-payment. A charge-off signifies the creditor has written off the debt as uncollectible, removing it from their active accounts. A charge-off does not forgive the debt; the cardholder remains legally obligated to repay the full amount.

Following a charge-off, the original creditor may sell the debt to a debt collection agency. These agencies purchase the debt for a fraction of its face value, then assume the right to collect the full amount from the cardholder. This transfer means the cardholder will deal with a new entity for payment; the debt may appear on a credit report from both the original creditor and the collection agency.

Legal Measures by Creditors

If collection efforts are unsuccessful, creditors or debt buyers may resort to legal measures to recover unpaid debt. A common action is filing a debt collection lawsuit against the cardholder. This legal proceeding initiates a court process, with the cardholder receiving a summons and a complaint outlining the alleged debt.

Should the court rule in favor of the creditor, a judgment is issued. This judgment is a court order confirming the debt is owed, empowering the creditor with stronger collection tools. A judgment can remain on a credit report for seven years from the date it was filed, or potentially longer depending on state laws and renewals.

With a court judgment, creditors can pursue various enforcement actions. Wage garnishment is a common method, allowing a portion of wages to be withheld by an employer and sent directly to the creditor. Federal law limits wage garnishments to the lesser of 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage.

Another enforcement tool is a bank account levy or garnishment, seizing funds directly from bank accounts. While certain federal benefits, such as Social Security or Veterans’ benefits, are typically protected from garnishment when directly deposited, other funds may be vulnerable. In some instances, a court judgment can lead to a lien on real estate, affecting property sale or refinancing until the debt is satisfied.

Credit Reporting and Its Implications

Non-payment significantly impacts credit reports, leading to a cascade of negative entries. Late payments (typically 30, 60, or 90 days past due) are recorded on the credit report. A charged-off account, signaling the creditor has written off the debt, appears on the report. If the debt is sold to a collection agency, a collection account will be added.

These negative marks remain on credit reports for up to seven years from the original delinquency date. Even if a charged-off debt is paid, the original negative entry typically remains, though its status may be updated to “paid” or “settled.” Judgments can also stay on a credit report for seven years or longer, depending on state laws.

The presence of these negative entries significantly affects creditworthiness. Potential lenders view such a history as an increased risk, making new credit cards, loans, or mortgages difficult to obtain. Approved credit often comes with significantly higher interest rates, reflecting the perceived risk.

Beyond traditional lending, a poor credit history can influence other financial aspects. Rental applications may be denied, as landlords often check credit reports to assess reliability. Insurance premiums (including for auto and homeowners policies) can be higher for individuals with lower credit scores. In some cases, employers may conduct credit checks as part of background screenings, potentially impacting employment.