What Is a Default Credit Card and What Happens Next?
Understand what credit card default means, its serious financial consequences, and how to address a defaulted account effectively.
A defaulted credit card signifies a cardholder’s failure to meet the agreed-upon terms of their credit card agreement. This serious financial event occurs when an individual consistently misses required payments. When an account defaults, the credit card issuer typically considers the debt a loss and takes steps to recover the outstanding balance. This status has significant and lasting consequences for a consumer’s financial standing.
Understanding Default Triggers
A credit card account typically enters a default status after a prolonged period of missed payments. While a single late payment might incur fees and a temporary credit score dip, true default usually occurs after approximately 180 days of non-payment.
Initially, an account becomes delinquent after 30 days past due. This is often reported to credit bureaus and can trigger late fees. As the delinquency extends to 60 days, the credit card issuer may apply a penalty Annual Percentage Rate (APR) to the outstanding balance, which can be substantially higher than the original rate.
If payments continue to be missed for around 90 days, the credit score damage becomes more pronounced, and the issuer might escalate collection attempts. The 180-day mark is a common threshold where the issuer “charges off” the account, writing it off as uncollectible and formally declaring it in default.
While less common than missed payments, other actions can also lead to default. Consistently exceeding the credit limit can trigger a penalty APR and signal financial distress to the issuer. Filing for bankruptcy almost always results in credit card accounts defaulting. A breach of other terms within the cardholder agreement, such as providing false information, can also lead to an account being placed in default.
Implications of Credit Card Default
Once a credit card account defaults, the repercussions are extensive. One of the most immediate consequences is severe damage to credit scores. A default can cause a substantial drop in credit scores, making it difficult to obtain new credit, secure loans, or even rent housing in the future. This negative mark remains on credit reports for up to seven years from the date of the original delinquency.
Beyond credit score damage, defaulted accounts incur increased interest rates and fees. The penalty APR, which can be applied after 60 days of missed payments, is often much higher than the original interest rate, causing the debt to grow more rapidly. Late fees, over-limit fees, and collection fees further inflate the outstanding balance.
The credit card issuer will close the defaulted account, revoking any access to the credit line. This closure impacts the consumer’s credit utilization ratio, potentially further lowering their credit score by reducing the total available credit.
Following account closure, the debt typically enters aggressive collection activities. The original creditor may attempt to collect for 30 to 90 days, sending letters and making phone calls. If these initial efforts are unsuccessful, the debt is often sold to a third-party collection agency.
These agencies may send frequent communications and, if payment is not secured, can initiate legal action. If a creditor or collection agency obtains a judgment through legal action, they may pursue court-enforced collection methods, such as wage garnishment or a bank account levy. Wage garnishment allows a portion of the consumer’s paycheck to be taken directly by the creditor, while a bank levy enables funds to be frozen and seized from a bank account.
Addressing a Defaulted Account
When a credit card account has defaulted, taking proactive steps can help mitigate the long-term consequences. Contacting the original creditor or the collection agency is a productive first step. Many creditors are willing to negotiate a payment plan or a settlement.
One avenue for resolution is a Debt Management Plan (DMP), often facilitated by non-profit credit counseling agencies. Under a DMP, the agency negotiates with creditors on the consumer’s behalf, potentially lowering interest rates and waiving fees, then consolidates payments into a single monthly sum. These plans typically aim for full repayment within three to five years.
Another option is debt settlement, where the consumer or a third-party negotiator offers to pay a lump sum that is less than the full amount owed, in exchange for the remaining debt being forgiven. While this can significantly reduce the amount paid, it is important to understand the tax implications.
The Internal Revenue Service (IRS) considers forgiven debt of $600 or more as taxable income, requiring it to be reported on tax returns via Form 1099-C. The amount of tax owed depends on the consumer’s federal tax bracket.
Consumers dealing with defaulted accounts also have rights under federal law, specifically the Fair Debt Collection Practices Act (FDCPA). This act prohibits abusive, deceptive, and unfair practices by debt collectors. For instance, collectors are restricted from contacting consumers before 8:00 a.m. or after 9:00 p.m. local time, and consumers can send written notice to stop communication.
Regularly checking credit reports from all three major bureaus is also important. This allows consumers to monitor the status of the defaulted account, ensure the accuracy of reported information, and dispute any errors that may appear.