What Happens If I Stop Paying Credit Cards?
Credit card debt in the U.S. increased 15% in 2022, the biggest one-year leap in almost 20 years. The number of people who are at least 30 days behind on credit card payments is also increasing, creeping back up to pre-pandemic levels.
Meanwhile, Americans are opening more credit accounts. Half of American adults have at least two cards, and 13% have five or more.
All of that adds up to credit debt that may be hard to handle. If that sounds like you, you may be tempted to stop paying your credit cards. After all, the payments are a huge chunk of your monthly bills, but the balances never seem to go down. So, what’s the point?
Take a deep breath and rethink that idea.
The credit card debt spiral may be bad, but the delinquent debt spiral is worse. The consequences of not paying your credit cards are financially devastating.
The immediate impact includes:
- Negative information on your credit report
- A drop in your credit score
- Aggravating contact from debt collectors
- Possible lawsuits for failure to pay
- Damage to future loan opportunities for a home, car or child’s education
In its most recent blog post, the New York Fed says, “Credit card use reflects constant and complex decisions by the credit card holders on consumption, saving, and borrowing: making a purchase, deciding how to pay (between multiple cards, payment options, and cash) and then finally managing their credit card balance by deciding how much of their balance to pay and carry over.”
When you have more credit card debt than you can deal with, there can be a breakdown in that process. If you’re at that point, don’t just give up. There are options that can get you back on track.
Consequences of Not Paying Credit Card Bills
There are many reasons that a person wouldn’t be able to pay their credit card debt:
- Job loss
- Medical emergency or illness
- Taking in or caring for a sick or elderly parent or relative
- Excessive credit card debt
Whatever the reason, all the creditor sees is the missed payment. Some creditors consider a payment received one day after the due date as past due, and will charge a late fee. But whether it’s one day late or 30 days late, once the late payment process begins, it follows a predictable path that leads to more financial trouble for you. Here’s how it works:
Late Fees Are Issued
A credit card company can charge a late payment fee one day after a payment is past due. Fees can be up to $30 for a first violation, and $41 for subsequent violations within six billing periods (a billing period is usually 30 or 31 days). Late fees are added to your balance, so the amount of interest charged increases, and the amount you owe rises exponentially.
Creditors Report to Credit Bureaus
Late payments appear on your credit report 30 days after a missed payment. On-time payments account for 35% of your credit score, so there’s an immediate unfavorable impact. Credit reports are compiled by credit bureaus Experian, Transunion and Equifax. Creditors report your activity to the bureaus, and lenders, landlords, insurance companies and more use it to determine your reliability as a bill-payer.
Credit card interest is calculated with an annual percentage rate (APR), and you are charged every billing period. Your card statement explains how APR is calculated and shows what you were charged that month in interest.
If you miss payments for 60 days, the credit card company can raise your interest to a “default rate.” The higher rate will increase your balance substantially.
If you miss payments on a zero-interest balance transfer card, the promotional rate may end and revert to the standard rate.
Debts Go to Collections
After 180 days, a credit card company can hand your unpaid bill over to a debt collection agency.
The job of debt collection is to make people pay money they owe. The Fair Debt Collection Practices Act protects you from debt collection harassment, but debt collectors will do what they can within the law to get the money. Collections appear on your credit report.
Creditors File a Lawsuit
If you ignore a collection agency, they can file a lawsuit seeking payment. Every state has a statute of limitations on filing a suit, which ranges from 2-10 years. The statute is for the state you live in, not where the lender is headquartered. The clock starts when you miss your first payment. It can be reset by contact with the debt collection agency, with rules varying by state.
A lawsuit can result in a lien against your property, wage garnishment and more. However, you can’t be sentenced to jail for not paying a debt.
The collector can’t file suit after the statute expires, but can still attempt to collect the debt.
Stages of Credit Card Delinquency
Credit card delinquency gets progressively worse the longer it goes on.
The stages are:
- 1 Day Late. A late fee can be applied
- 30 Days Late. A late fee and a ding on your credit report
- 60 Days Late. Default interest rate can be applied, and late fee can increase from $30 to $41
- 90, 120, and 150 Days Late. Late fees continue to be added to your balance and higher interest compounds, increasing the amount you owe; your credit score continues to go down as late payments take their toll
- 180 Days Late. The credit card company can hand your debt off to a debt collection agency
How to Pay Off Your Credit Card Debt if You’re Behind
By now it should be clear what happens if you stop paying your credit cards. It isn’t good news.
But you can take steps to catch up and manage your credit card debt, no matter how bad your financial situation is.
Credit card debt help comes in many forms, and the one that’s best for you depends on your financial situation, your spending habits and even your ability to negotiate.
- Nonprofit credit counseling
- Work with your credit card companies
- Make a budget
- Debt consolidation
Before you begin to consider options, you must get a handle on how much debt you have and what it’s costing you. The place to start is with your monthly credit card statements.
If you pay online, your statements will be downloadable from the card website. Going through them thoroughly may be the cold splash of reality needed to get your financial house in order.
The fees and interest you pay every month may be a shock if you’ve never looked at the statement. Credit card companies are also required to inform you how much it will cost, and how long it will take to pay off your balance if you only make minimum payments. The numbers are likely more than you ever dreamed they would be. And that’s if you stop using the card right now!
Use those numbers as motivation to get to work on eliminating credit card debt.
Nonprofit Credit Counseling
Nonprofit credit counseling is a great starting point no matter what debt relief method you choose. The counselor will review your finances, help you create a budget, offer financial education resources, and options to eliminate debt. Counseling is free, and nonprofit credit counselors are required by law to give you advice that’s in your best interest, not their company’s.
Work with Your Credit Card Company
Many credit card companies are willing to help customers who are in financial trouble, particularly if a life-altering event has put you behind, or if you can catch up in a few months. They’d rather get paid than see you default.
Card companies may offer:
- Hardship programs
- Late fee waivers
- A limited-time lower payment
- Limited-time lower interest
- Reduce minimum payment amount
Some credit card companies have a phone number on their website specifically for hardship requests. With others, you can call customer service. They will talk to you because each situation is unique. Be sure you know what your budget is and what you’d be able to pay each month before you call. Take notes and ask them to send you their offer in writing, so you can be sure you understand the details.
Make a Budget
Budget management is all some people need to take control of credit card debt. An accurate accounting of how much money you have coming in monthly, your expenses, and what you have (if anything) left over, can clarify how much you can pay toward lowering credit card debt. Since paying the minimum on a credit card won’t do the job, an effective budget allows payments above the minimum.
Debt consolidation means combining your debt so that you make one monthly payment, often at a lower interest rate than what you paid for the individual debts. The benefits of debt consolidation are that you pay less monthly, and likely overall, and you’re managing one payment, rather than several.
The most common methods are:
- Debt consolidation loans: This is a loan designed specifically to consolidate debts (the lender may even mail the payoffs director to your creditors), with a lower interest rate and fixed term.
- Debt management programs: Nonprofit debt management reduces interest rates on your credit cards and eliminates debt within 3-5 years. The credit counseling agency makes the payments, and you make once fixed monthly payment
- Balance transfer cards: A credit card with a promotional interest rate of 0% for a certain amount of time (usually 12-18 months) on balance transfers. If you don’t pay the transferred balance off by the deadline, the interest rate goes up.
- Home equity line of credit or loan: Money you borrow against the equity in your home. This has a much lower interest rate than credit cards, but you are also putting your home on the line. A line of credit is open-ended as well, opening the door for running up more debt.
- 401(k) loan: Most 401(k) programs allow borrowing from your balance. You pay yourself back through payroll deduction. On the downside, you are reducing the amount of capital gathering interest for your retirement and may be subject to taxes or fees if you leave the employer that oversees the retirement plan.
Bankruptcy should be an option only if no other solution works. It wipes out debt, usually allowing you to keep many of your possessions including your home and car. But your finances and credit score take a big hit for the next seven to 10 years.
Chapter 7 bankruptcy, the most common for consumers, protects necessary assets like your home, car, Social Security, pension and more. A court-appointed trustee sells off nonexempt assets and the money is used to pay off unsecured debt. What can’t be paid off is forgiven.
Chapter 13 bankruptcy allows you to keep your assets. You make regular payments to a court-appointed trustee to pay down debt under a 3 to 5-year plan.
Your credit score will decrease 100-200 points with bankruptcy, and it stays on your credit report for seven to 10 years, which means it will be hard to get a car loan, mortgage or other credit.
Get Help Managing Credit Card Debt
While it may be tempting to simply stop paying your credit cards and let the chips fall where they may, the consequences can be devastating. If you think managing your bills is hard now, the domino effect of a plummeting credit score, rapidly growing late fees and interest, collections calls, loss of credit opportunities and more will make things much worse.
A nonprofit credit counselor can put it into perspective and help you go from feeling overwhelmed to feeling in control.
Counseling is free and certified by the National Foundation for Credit Counseling (NFCC). The counselor will review your finances, help you create a budget, and go over the debt-relief options, from debt management programs to bankruptcy, helping you decide which is best for your situation. Counselors are required by law to offer you the best debt-relief option for your situation, rather than sell you a product.
Credit counseling services include helping you access your credit report, free financial education tools, budgeting help and more. A recent study found that consumers who sought debt relief reduced their revolving credit by nearly $1,800 in the 18 months after talking to a counselor. The study theorized that simply discussing debt and finances with a counselor, and accessing financial education tools, helped consumers with credit card debt focus on decreasing it.
Credit counseling clients who also joined a debt management program reduced revolving credit by more than $2,000 over the first 18 months. DPMs last 3-5 years and by the end, will have eliminated credit card debt.
If you stop paying credit cards, you are putting off a problem that will just become worse. Get a start on solving the problem by contacting a nonprofit credit counseling agency, so you can find a solution that will eliminate your debt and make your finances stronger.
About The Author
Maureen Milliken has been writing about finance, banking, investment, entrepreneurship, real estate and other related topics for more than 30 years. She started as the “Business Beat” columnist for the now-defunct Haverhill (Mass.) Gazette and currently is one of the hosts of the Mainebiz business-focused podcast, “The Day that Changed Everything” in addition to her daily writing. She also is is the author of three mystery novels and two nonfiction books.
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