What Happens If You Stop Paying Credit Cards? Well, not-so-great things will happen…that's what! 🙁
Credit cards are great tools to have if you’re able to use them wisely. Unfortunately, many people get caught in situations where they’ve overspent and cannot pay off their balances in full. Worse yet, there are times when some can’t make payments at all. What happens then?
If you have multiple credit cards and are worried you won’t be able to make payments on all of them, consider using this debt consolidation calculator, as it can help you find a way to streamline multiple payments into one. Not paying your debt can have dire consequences, so do this first.
What are those dire consequences? It depends on your cardholder agreement, but in most cases, this is what will happen:
Interest will accrue on your balance
After the payment deadline, the outstanding balance on your credit card will accrue interest. The annual percentage rate (APR) that you’ll be charged is listed on your cardholder agreement as well as your closing statement.
Interest on outstanding balances will compound until the balance is paid off in full. So, if your balance increased last month due to an interest charge, you’ll now pay interest on top of the old balance plus the interest.
Your interest rate will increase to the maximum
Most credit cards have a clause that says if you are late, then can increase your APR to the maximum amount allowed.
This can often mean your rate will increase to 30%+ depending on the card. So when your balance starts compounding (as stated above) at a high rate like this, your outstanding principal balance will grow very very fast:(
You’ll be hit with fees
Your cardholder agreement will let you know if there are any penalties for late or missed payments. Typically the charge is anywhere from $29 – $59 and is subject to interest if not paid off before the next statement closing date.
In addition, if your payment is late because the check or withdrawal from your bank account bounced, you’ll be subjected to another fee from both your creditor and your bank.
Your credit record will be updated
The two most critical factors of your credit score are the Credit Utilization Ratio and the number of late payments. Late payments are reported to credit bureaus after 30 days and then updated every 30 days after.
So if you cannot pay your credit card at all for four months, your credit report will show a payment that’s 120 days late and will continue tracking until the payments are made in full.
The longer your payments remain late, the lower your credit score will fall and the harder it will be for you to get access to new credit cards, loans, or credit increases.
Late payments can stay on your credit score for up to 7 years. Yikes!
Your debt is sent to a collections agency
After a certain amount of time, usually 120 days, your creditor will write off your debt and pass it onto a collections agency. Collections agencies are relentless with getting your debt resolved and may attempt to contact family members or your employer, though this is illegal in some states.
Still, collections agencies exist solely to get old debts paid off and can cause an awkward situation with your family or employer with just one attempt. Collections agencies can also take you to court to get your debt resolved through wage garnishment, though this is rare.
The bottom line
When you’re in a bad financial situation, it’s important to keep your creditors informed so that they can work with you to resolve your debt. By avoiding them and not making payments, you’ll see any of these consequences, which make becoming debt-free even more difficult.
Don’t give up hope, though. The more you keep communication open with your creditor, the higher likelihood you can get your issues resolved without needing drastic measures like bankruptcy.
Hopefully, this article sheds some light on what happens if you stop paying credit cards. Here are some other articles on the topics of credit and debt for ya!