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In North America, debt is a serious problem, particularly when it comes to unsecured credit card debt. Unfortunately, credit cards can be just as much of a burden as they can be a useful financial tool. The responsible use of a credit card (paying your bills on time and in full) can improve your credit score, which strengthens your credit report, making it easier to secure new credit in the future. But, being irresponsible with your credit cards (missed or late payments) comes with a slew of consequences, ones that could land you under a mountain of debt. And once you’re under that mountain, it can be extremely hard to hike back up.
So, just what are the consequences of stopping your credit card payments entirely? If you’re already a credit card user, you’ll know that by making at least the minimum monthly payments, you’ll be avoiding the worst of those repercussions. But, if you’re reading this article, it’s possible you’ve already ceased your payments or are just about to. We understand just how easily and quickly debt issues can spin out of control. That being said, if you’re starting to, or will soon default on your credit card payments, it’s important to be aware of the consequences that follow.
Want to learn how to tackle your debt once and for all? Click here.
What Does “Defaulting” Mean?
The term “default” means that an individual has failed to fulfill an obligation. In this case, we’re talking about the terms dictated by the contractual agreement for your particular credit card. While almost every type of credit card has some extra fine print in its contract that needs to be read, the basic rules always apply. You, as the cardholder, have to make at least the minimum monthly payment (although you should always try to pay in full, if possible), by the due date, without exception, to avoid a penalty. Once you’ve fulfilled that obligation, you can continue on using that credit card until your next bill rolls around.
Then again, if you miss a payment, even if that payment is only late by a few days, you’re technically not meeting the terms of your contract and are therefore defaulting. While some lenders, like credit card companies, will allow you a few missed payments before they actually label your account as “defaulted”, others will assign the status immediately. Either way, it is not a good idea to let yourself get into default mode because once you’ve started, you might find yourself in a tough situation very quickly.
For more information about loan default, click here.
Late and Missed Payments
So, what happens when you start missing credit card payments? Not too much at first, at least that’s the initial thought. For larger loans like mortgages, which are typically worth hundreds of thousands of dollars, your lender is likely going to give you more than a stern lecture when you default on a payment, even if that payment is just late or short. Being that mortgages are so expensive, your mortgage lender, especially if it’s a bank, is going to start worrying right away. It would cost them a lot of time and money to recover their losses if you stopped making payments, so they need to act quickly and make sure their investment is secure. So, if you default on your mortgage payments, you’ll be reminded of it quickly.
Credit card companies, on the other hand, deal with cases of late and missed payments all the time. Because they are large companies, one borrower who forgets to make a single monthly payment isn’t going to bother them much, at least not to begin with. It will sometimes take several missed payments before the company actively starts to contact you, inquiring about why you’re defaulting and if you intend to pay. That’s why a lot of credit card users don’t truly consider the consequences of defaulting until it’s too late. Let’s say that you haven’t set up automatic payments and transfers through your bank (which we recommend if you have sufficient funds). You receive your credit card bill, but with everything else you have going on, you forget to meet even the minimum monthly payment. You’ll be charged a late fee, which, depending on your card company, can be $20-30 in some cases. The notice of that penalty will only show up on your next credit card statement. Keep in mind that every credit card company operates differently in the way they handle their defaulting customers.
What Happens to Your Interest Rate?
The next thing that happens is that your penalty fee(s) will start accumulating interest, just the same as any unpaid charges to your credit card. Then your interest rate will go up, which is one of the primary ways that your debt can get out of hand so quickly over time. When you sign up for a new credit card, you’re going to get an introductory interest rate, which is based on your credit score, although many banks will offer special promotional rates when you become a new customer. But, when you default, your interest rate will climb sometimes by as much as 5%.
In the long run, these hikes in interest can be a huge drain on your finances, costing you hundreds, maybe even thousands of dollars over the coming years. As your debt piles up, you could be paying off a $5,000 credit card bill some 65 years later. That could amount to a whopping $22,000 worth of interest! In fact, credit card companies are now required to include information on their statements that detail just how much you could end up owing if you only make the minimum payments.
For more information on how your credit score is calculated, take a look at this video.
What Happens to Your Credit Report and Score?
Some of the worst damage caused by defaulted payments will actually be to your credit report and credit score. Once again, not all credit card companies will immediately report a single missed payment to Canada’s two major credit bureaus, Equifax and TransUnion, especially if it’s it’s paid within 30 days. If you haven’t missed any earlier payments, and manage to pay your bill late, your interest rate might go up slightly, but your credit score won’t immediately be affected. However, if you already have a track record of defaulted payments, or you go over the 30-day limit (which could mean you’ve missed two payments in a row), that’s when things start to take a turn for the worst.
Heard about the recent Equifax Information Breach? Read this to find out more.
Following the second defaulted payment, it will become more and more likely for any credit card company to report your activity, or lack thereof, to the credit bureaus. Again, depending on how your particular card company functions, even at 30-60 days worth of defaulted payments, they may still give you a bit of leeway, although some companies won’t. But, at the 90-day mark, or three missed payments later, all bets are off and your failure to follow through with your agreement will be reported. As we said, the penalty fees are not the only consequences that will befall you. If your default is reported after the 30-day limit, your credit score is going to take a major hit, even worse if it’s closer to or over the 90-day limit.
Once you’ve stopped making credit card payments for an extended period of time, your credit rating will drop. On your credit report, letters are assigned to each type of debt you have. Credit card debt is labeled with an “R”, which stands for “revolving”. For example, if you’ve been paying your bills on time, your rating will be R-1 for that account. But, if your payments come in 31-59 days late, your rating will change to an R-2. While that might not sound so bad, trust us, it’s certainly not good. On top of all this, a notice of delinquency will be put on your report, where it will stay for 6-7 years, and your credit score will suffer for it.
Why is that so bad, you might ask? Well, your credit rating and credit score are huge deciding factors for your future as a credit user. Whenever a lender or other organization needs to review your credit report while considering you for new credit products (loans, lines of credit, credit cards, etc.), your credit score is an especially important factor. Not only is the health of your credit score a tool that lenders use to calculate the interest rate they’ll be giving you, but it’s also going to make a big difference as to whether you’ll qualify for the product in the first place. In other words, the lower your credit score is, the worse your chances are of getting approved. Lenders will examine your report, see that your credit rating and score went down and conclude that you’re a risky investment, which could lead to you being rejected for a car loan, a mortgage, or other types of credit you might desperately need down the line
Do you know how back credit can affect your daily life? Click here.
What Happens When Your Account is in Collections?
In simple terms, it’s someplace that you don’t want to be. Once your debt has gone for more than 30-days without being paid, soon after you might hear from one of a credit card company’s in-house collections specialists. This is an initial measure that the company will take before actually hiring a collections agency to recover their losses. An employee of the card company will call you, inquiring about your unpaid bills. They might not demand payment forthright, but they’ll certainly warn you about the ongoing consequences of you continuing to default. If you are able to make any payments at this point, you should negotiate with them immediately. They may even waive some of your accumulated late penalties if you agree to pay more than the minimum. If you can’t make any payments, things will again become more drastic.
Charge-off Status and Collections Agencies
When your unpaid account reaches the 180-day (6-months) point, that’s when your credit card company will put your account in “charge-off” status, meaning you’ll no longer have access to credit. After your account has been charged-off, a record of that will also show up on your credit report, where it will remain for 7 years. New potential lenders will then see this notice, determine that you have a history of not paying your dues and it’s possible that they could reject your application. Once things reach that point, your credit card company will likely give up trying to collect their debt.
However, just because the credit card company doesn’t come knocking, doesn’t mean that others won’t. By that time, the card company will likely have sold your debt to a collection agency, who will pick things up where they left off. Since that collections agency now owns your debt, they will legally be allowed to pursue you for it. You might start receiving phone calls and letters at home and work. These actions can be considered borderline harassment, so it’s important to understand your rights and know that there are people you can contact to prevent a debt collector from abusive collection tactics. If you’re being intimidated by a debt collector, you can contact the Financial Consumer Agency of Canada.
If you’re currently dealing with a debt collector, or are looking for more information, click here.
Depending on just how much you owe they may even threaten to sue you. Although this isn’t a common occurrence (creditors don’t always take default cases to court, because it’s expensive and time-consuming), it does happen under certain circumstances. In fact, most Canadian creditors won’t take legal action against overdue accounts that amount to less than $5,000. But, if your creditor or the collection agency decides that the likelihood of recovering part of their loss from you is high enough, they might go ahead and sue you.
If they sue you and win, then you may be subject to actions like wage garnishment, wherein a portion of every paycheck you earn from that point on will be taken, until your debt is paid back in full or to a satisfactory amount.
That being said, there is a statute of limitations in Canada, pertaining to unsecured debt only, which prevents a creditor or debt collector from taking legal action against you (such as wage garnishment) after a certain number of years has passed since the last time you made a payment. The number of years varies from province to province. Do not take this ruling as a miracle that simply erases your debt. Even if you can prove in court that your debt has passed the limitations of a creditor’s legal actions, that won’t stop them from contacting you in the years that follow. Although after several years might have passed, the case is over and you’ve managed to repair your credit somewhat, those same creditors can continue to report your delinquent account to the credit bureaus, which in turn will eventually ruin your credit all over again.
Check out this infographic to learn about the true cost of borrowing.
What to Do if Your Credit Card Debt is Getting Out of Hand
First and foremost, the best thing you can do to prevent your credit card debt from ruining your financial livelihood is to be proactive and tackle the debt to the best of your abilities. Even though your bank account might be drained for a while, it’s nothing compared to how much you might end up paying if you default on your payments for too long. If you can’t afford to pay your credit card bills in full, sticking to the minimum payments is a temporary solution, but not one that you should keep up for the rest of your life.
So, if your rising debt level is getting so high that you cannot manage it, you can also consider the following options:
- Seek the help of a professional credit counsellor for more information.
- Enter a debt management program.
- File for a consumer proposal.
- File for personal bankruptcy (only if you have no other choice).
Filing for bankruptcy should only be considered as a last resort, but if your debt situation is so bad that it’s going to ruin your finances, it might be time to start thinking about it. Remember, while the consequences that follow unpaid credit card debt might take years to reach fruition, in the end, they could end up costing you your financial health. You don’t want to be living in a constant state of crushing debt for the rest of your life. You might not even be the only one that suffers for it. So, think of yourself and your family and make sure that you’re prudent with your credit card bills.
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