Consequences of Defaulting on Credit Card Debt
Ignoring credit card debt will not make the situation go away and the results will follow you for years. Ideally, it's best to work out a payment plan with your creditors to pay off the debt. However, if you default on credit card debt, it will affect your credit, overall debt and you may even end up with a lawsuit.
The initial impact of defaulting on a credit card is late payment fees and interest rate hikes. Late fees will continue to grow and will be applied to your balance as long as the account is open. The late fees combined with higher interest rates results in soaring monthly payments and further debt. Unfortunately, individuals who were unable to make the minimum payment due before defaulting find themselves in a worse financial situation after the fact. As of February 22, 2010, your interest rate will only go up if you are more than 60 days late on your payment.
Creditors and Collections
If you’re only a few days or weeks late, the creditor will try to contact you by phone and possibly by mail. If you are unable to make payments, or a payment plan cannot be reached within a reasonable amount of time (usually three to six months), the creditor will refer the account to an outside collection agency and close the account. A collection agency will try to get as much of the debt owed and may work out a payment plan with you.
Credit Score Effects
Late or delinquent payments have one of the most detrimental affects on your credit score. If your credit score drops dramatically, other lenders may increase your interest rate or decrease your available credit. Additionally, being approved for further credit may be more difficult.
If your account is seriously delinquent or you cannot work out a payment plan with your creditors, the credit card company or a collection agency may bring a lawsuit against you. If a judgment is brought against you in court, your wages may be garnished or a property lien may be ordered.
If you are unable to make your credit card payments, contact your creditors and explain the situation. Most lenders are willing to work out a payment plan, if you communicate with them, possibly avoiding late fees and interest hikes. Additionally, if debt has got out of hand and you cannot make your monthly payments, consider using the services of a reputable credit counsellor. Credit counsellors will work with creditors to lower payments and help you create a budget.