What Will Happen If I Stop Paying My Credit Cards?[yoast-breadcrumb]
What Will Happen If I Stop Paying My Credit Cards?
Falling behind on credit card payments can feel scary and overwhelming. With late fees, potential damage to your credit score, and constant calls from creditors, it may seem easier to avoid the issue altogether by stopping payments. But even if you are in a tough financial spot, continuing to make at least the minimum payments on your cards should be a top priority.
Here’s a look at what can happen if you stop paying your credit cards and some steps you can take if you are struggling to keep up with payments.
Your Credit Score Could Plummet
One of the most immediate effects of not paying your credit cards is damage to your credit score. Payment history makes up a significant portion of your FICO credit score, which is used in most lending decisions.
Every time you miss a payment, it can be reported to the credit bureaus and stay on your credit report for up to seven years. Just one 30-day late payment can cause your score to drop by over 100 points. Consistently missing payments month after month can cause an even more dramatic hit.
A lower credit score makes it harder to qualify for loans, credit cards, and other financing at favorable interest rates. Landlords and insurance companies may also check your credit when deciding whether to approve an application.
You’ll Be Charged Late Fees
In addition to credit damage, your card issuer will likely charge a late fee that typically ranges from $25 to $40. Some issuers may charge late fees as high as $50 or more. These fees add insult to injury when you’re already struggling to pay.
Late fees are usually charged after a grace period of at least 15 days after your due date passes without payment. But some issuers charge late fees as soon as the day after a missed payment. Be sure to check your card agreement so you know your issuer’s policy.
Your Interest Rates Could Go Up
Many credit card companies will hit you with a penalty APR if you pay late multiple times in a short period. Penalty rates can be 10, 20, or even 30 percentage points higher than your normal APR.
This steep increase makes balances much more expensive to pay off. A $5,000 balance at a typical 15% APR costs around $125 per month in interest. At a penalty rate of 30%, that monthly interest charge jumps to $208.
Your Credit Limit Could Be Lowered
To limit additional risk, your credit card company may reduce your credit limit by hundreds or even thousands of dollars if you are consistently late with payments. This can be another blow to your credit score by increasing your credit utilization ratio.
Say your limit is lowered from $5,000 to $1,000 but your balance stays at $2,000. Now your utilization has jumped from 40% to 100%, which can lower your score.
Your Account Could Be Closed
If your payment problems drag on for months, eventually your credit card company may close your account altogether. They don’t want to let someone who doesn’t pay their bills continue charging purchases to their card.
Closing an account you’ve had open for a long time can shorten your credit history and further damage your credit scores. You’ll also lose access to that credit limit, which as mentioned can negatively impact your utilization.
You May Be Sued
If you become severely delinquent, your credit card company may eventually decide to take legal action and sue you to recover the unpaid debt. If they receive a court judgment against you, they can then attempt to collect through wage garnishment, bank account levies, or property liens.
Being sued and having your wages or bank account garnished can be a financial nightmare. In some cases, you may even be forced to file for bankruptcy as a last resort.
The Debt Could Be Sold to a Collection Agency
Before a credit card company takes the expensive and time-consuming route of suing you, they will often sell severely delinquent debts to a collection agency. The agency pays a fraction of the balance owed and then pursues collection activities.
Collection agencies are notorious for frequent robocalls and aggressive, threatening tactics to get borrowers to pay. Having an account in collections also tanks your credit scores.
What to Do If You Can’t Pay
If you are struggling to pay your credit cards, taking action early is critical to avoid the consequences above:
- Contact your credit card company right away – Most issuers will work with you on a hardship program or alternative payment plans. They want to help you get back on track.
- Consider credit counseling – Non-profit credit counseling agencies can help you manage your debt through options like debt management plans.
- Prioritize minimum payments – Pay at least the minimum to avoid late fees and severe delinquency.
- Reduce expenses – Cut discretionary spending so you can shift money to pay down your balance.
- Look for additional income – Pick up side jobs to come up with extra money for payments.
While stopping credit card payments may seem like the easiest short-term solution, it can lead to significant financial pain down the road. Contact your issuers right away and take steps to get your accounts back in good standing.