Missed a credit card payment? Here's what to expect regarding late fees and your credit score.
Racking up a significant balance on your credit card can lead to uncertainty about repayment. While it may seem minor to miss one payment, the reality is that even a single late payment can trigger severe repercussions.
One late payment can initiate a troubling sequence of events that affects your credit and financial health for years ahead. Let’s explore what truly occurs when you miss a credit card bill.
The First Month
Missing your payment by even a day could incur a late fee, which may be detailed in your credit card's terms. For the first missed payment, expect a fee up to $27, according to a financial expert. Additionally, your interest rate might rise. Card issuers have the discretion to determine how late your payment must be before increasing your rate, which can reach as high as 29.99 percent on future purchases.
Moreover, your credit score can drop instantly. Timely payments are a crucial element in calculating your FICO score, so a missed payment can cost you points immediately.
2 to 3 Months
Once your payment is over 30 days overdue, it gets reported to credit bureaus, which can linger on your credit report for up to seven years. You can mitigate the damage by ensuring future payments are made on time.
When your account sits between 60 and 90 days overdue, your card issuer typically restricts new purchases, and further late fees accumulate. After the initial missed payment, subsequent fees cap at $37, as outlined in the Credit CARD Act of 2009, adjusted annually for inflation.
Interest rates can also be raised after 60 days of non-payment. Although the CARD Act generally prevents retroactive interest changes on your existing balance, being over 60 days late is an exception, allowing the issuer to apply the new rate to your entire outstanding balance.
Fortunately, before raising your rate, creditors must notify you 45 days ahead. If you manage to pay before this period ends, you can avoid the increase.
As you approach 90 days, expect persistent calls from your credit card company, and a higher interest rate will kick in.
4 Months or More
Ignoring your credit card bill for several months leads to your account being classified as “charged off,” indicating the issuer considers repayment unlikely. At this stage, your debt may be sent to a collection agency, and you will need to negotiate directly with them.
Having a debt in collections can severely affect your credit score and remain on your report for seven years. This negative mark complicates future credit applications, including new credit cards, loans, and renting homes.
Collectors will reach out to recover payment, and you might also hear from the IRS. They send a Form 1099-C for “canceled debt,” indicating tax obligations on the forgiven amount.
In some situations, instead of a charge-off, your credit card company might pursue legal action to secure payment. This is rare but could result in a court judgment, leading to wage garnishments that can take up to 25 percent of your earnings, depending on local laws.
The Long Term
Repeated missed payments can inflict lasting damage on your credit score, which is crucial for many adult milestones. A low score can hinder your ability to lease apartments, buy homes, or finance vehicles. Additionally, insurance rates often correlate with credit scores, and employers increasingly check credit reports during hiring processes.
Dig Yourself Out
If you can’t meet your minimum payment, reach out to your credit card company's hardship department. If you’re experiencing a true financial crisis, such as job loss, and have a history of timely payments, your creditor may offer a payment plan.
Act quickly to prevent further late fees and credit damage.
For multiple high-interest credit cards, think about consolidating your debts.
Consider hiring debt negotiation services to lower your principal balance, but research thoroughly to ensure they can deliver on their promises. This route is best for those who might need to consider credit counseling or bankruptcy.
Credit counseling agencies can assist in reducing interest rates, but this may not be effective for those with significant debt who struggle to pay, as just lowering rates may not be sufficient.
The Last Resort
If all else fails and debt remains unpaid, filing for Chapter 13 bankruptcy is an option. This does involve structured repayment plans, which may be less favorable than those offered by debt negotiation services.
Consult an attorney in your state before deciding on bankruptcy. Weigh this option carefully, as it can be costly and painful while negatively impacting your credit rating for years.
