What Happens When You Stop Paying Credit Cards?
Explore the detailed sequence of events and lasting effects on your financial standing when credit card payments are discontinued.
Stopping credit card payments triggers significant financial and credit consequences. Understanding these implications is important for anyone navigating personal finance. This article discusses what occurs when credit card obligations are no longer met.
Immediate Financial and Credit Impacts
Missing a credit card payment typically incurs late fees, often $30 to $41. A second missed payment within six months can trigger a higher fee.
Missed payments can also substantially increase the Annual Percentage Rate (APR). Many agreements include a penalty APR clause, allowing the issuer to raise the interest rate significantly if a payment is 60 days late. This elevated rate applies to new purchases and existing balances.
Missed payments are reported to the major credit bureaus—Experian, Equifax, and TransUnion—after 30 days past due. This negative mark on a credit report lowers an individual’s credit score. The longer payments remain delinquent, the more severe the damage to the credit score becomes.
Creditor Collection Activities
Once payments stop, the original credit card issuer’s internal collections department initiates contact. This typically involves phone calls, emails, and letters to remind the cardholder of the overdue amount and encourage payment.
If the debt remains unpaid after 180 days of non-payment, the original creditor will “charge off” the account. A charge-off signifies the creditor considers the debt uncollectible, removing it from their active accounts. However, the debt is not forgiven; it remains legally owed.
Following a charge-off, the original creditor may assign the debt to a third-party collection agency or sell it outright to a debt buyer. When debt is sold, the new owner assumes the right to collect the amount owed. This means the individual will interact with a new entity, which may use different collection strategies.
Legal Actions by Creditors
When collection efforts fail, a creditor or debt buyer may pursue legal action to recover the outstanding balance. Lawsuits are typically filed for substantial debts when recovery through courts is likely. This process begins with the individual being served a summons and complaint, notifying them of the lawsuit and claims.
If the individual does not respond to the lawsuit within the specified timeframe, the court may issue a default judgment against them. A default judgment means the court has ruled in favor of the creditor due to the defendant’s failure to respond. This judgment can remain on an individual’s credit report for many years.
With a judgment, creditors can employ various enforcement mechanisms. These include wage garnishment, where a portion of earnings is withheld and sent to the creditor. Additionally, a creditor may seek a bank account levy, allowing seizure of funds from bank accounts. In some jurisdictions, a judgment can also lead to a property lien, attaching to real estate, requiring satisfaction before sale or refinancing.
Long-Term Credit Report Consequences
Ceasing credit card payments creates significant negative entries on an individual’s credit report. Each missed payment, reported after 30 days, appears as a late payment mark. If the account is charged off, this status is also recorded.
Accounts sent to collections or sold to debt buyers will appear as collection accounts. A court judgment, if issued, will also be displayed. These negative marks substantially lower credit scores, making it difficult to obtain new credit.
Most negative entries, including late payments, charge-offs, and collection accounts, can remain on a credit report for up to seven years from the original delinquency date. Judgments can remain for longer periods, up to ten years or more if renewed, depending on the jurisdiction. These items can hinder approvals for loans, mortgages, rental applications, and employment.
Debt Resolution Outcomes
Credit card debt may eventually be resolved through specific outcomes after non-payment. One outcome is debt settlement, where the creditor agrees to accept a lower amount than the full balance owed. While providing relief, the settled amount is typically reported as “settled for less than the full amount,” negatively impacting credit.
If a creditor cancels or forgives debt, they are required to issue an IRS Form 1099-C, Cancellation of Debt. The amount of debt forgiven may be considered taxable income. This can lead to an unexpected tax liability for the individual.
Another resolution is bankruptcy, a legal process to discharge or reorganize debts. Chapter 7 bankruptcy involves liquidating non-exempt assets to pay creditors, discharging most unsecured debts. Chapter 13 bankruptcy involves a court-approved repayment plan over three to five years, discharging eligible remaining debts afterward. Both forms of bankruptcy significantly impact credit reports, remaining for seven to ten years, but they provide a legal fresh start from overwhelming debt.