Everything You Need to Know About Credit Card Defaults

Everything You Need to Know About Credit Card Defaults.

Credit card defaults among Americans are increasing, having reached the highest level in 14 years.

Credit card defaults among Americans are experiencing a significant increase, reaching the highest levels observed in 14 years. According to the Financial Times, which referenced data analyzed by BankRegData, U.S. credit card defaults surged to an unprecedented $46 billion from January to September 2024.

The combination of elevated credit card debt and persistent inflation has left many consumers struggling to meet their monthly payment obligations, resulting in a rise in defaults.

A borrower is considered to be in default after failing to make credit card payments for more than 180 days, or approximately six months. When payments are missed for such an extended duration, banks typically interpret this as an indication that the borrower is unlikely to repay the debt, as noted by Matt Sotir, a financial advisor with Equitable Advisors in New Hampshire.

Defaulting on credit card debt can lead to severe repercussions, including detrimental effects on credit reports, which can have a prolonged impact on an individual's ability to secure future loans, according to Sotir.

“These are debts that have a lot of impact and I think sometimes people don't realize that if they missed (a payment), how bad it could be for them in other areas,” added Sotir.

It is important to understand the implications of credit card defaults.

The repercussions of failing to make credit card payments can vary in severity. Initially, individuals may face late fees, increased interest rates, and a decline in their credit score. If a payment is missed for 30 days, the bank categorizes the credit card as "delinquent," which can further harm the borrower's credit rating.

Should a borrower neglect to make a payment for approximately six months, the bank will classify the credit card as being in default. This designation leads to the closure of the account and the referral of the debt to a collection agency, as noted by Chip Lupo, a writer for WalletHub.

“That's where you're going to really have trouble obtaining future credit for a while,” said Lupo.

When a collection agency takes over your debt, they will contact you through phone calls, emails, and letters to prompt payment. If the debt remains unpaid, the agency may ultimately pursue legal action against the debtor.

Sotir advises that the initial step is to be proactive. Engaging with your bank or consulting a financial advisor can help; the sooner you begin exploring feasible solutions, the more potential repercussions you can mitigate.

“I’ve seen it over the years, when someone gets in trouble, it’s easy to cocoon and not want to deal with it,” said Sotir

Sotir and Bandebo advise contacting your credit card issuer to negotiate your debt, as it is advantageous for the bank to assist you in getting back on track. Should your account be transferred to a collections agency, inquire whether they can provide a payment plan, or consider seeking assistance from a non-profit credit counseling service or a financial advisor.

While it is ideal to pay your credit card balance in full each month, if that is not feasible, making at least the minimum monthly payment can prevent you from accumulating additional debt, according to Rikard Bandebo, chief economist at VantageScore, a credit modeling firm.

“Do whatever you can not to get to the next stage. If you're 30 days late, try to avoid getting to 60 days and absolutely try to do everything you can to avoid getting default,” said Bandebo.

If you are experiencing difficulties in making payments on your credit card, it is advisable to contact your bank to inquire about the possibility of enrolling in a payment plan.

Other options may include reaching out to a credit counseling service or considering the transfer of your credit card debt to a card with a 0% interest rate, although this option may involve associated fees.

Failing to meet credit card payment obligations can have significant repercussions on your credit score, which in turn will affect your borrowing capacity and the cost of future loans. According to Bandebo, neglecting to pay your credit card bill for a single month could result in a decline of your credit score by approximately 60 to 100 points.

While there is no fixed number of points that your score will decrease upon default, such a default will remain on your credit report for a duration of seven years, as noted by Bandebo.

Bandebo frequently likens credit scores to a reputation; they require considerable time and effort to establish, yet a single misstep can lead to prolonged setbacks.

“There's not miracle solutions that once you've missed a payment, or you've gone to default, to simple go back to where you were. You can't just flip a switch," said Bandebo.

If you are unable to consistently make payments on your credit cards, Sotir advises that you begin by reviewing your budget to identify potential areas for expense reduction, and consider the possibility of obtaining an additional source of income.

Too many credit cards? How do you pay off credit card debt?

“For most people, it's really about understanding how much money is coming in and where it's going,” added Sotir.

If your expenditures exceed your income, Sotir advises seeking a temporary second job, exploring the possibility of selling any assets you may possess, or reaching out to family members for support while you work to regain financial stability.

Furthermore, certain banks provide hardship programs designed to assist individuals struggling with substantial and high-interest credit card debts.

Lupo emphasized that bankruptcy should be regarded as a last resort after all other options have been thoroughly explored.

Should your financial situation prevent you from continuing payments, it is crucial to begin searching for alternatives promptly, as recommended by Bandebo.

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Credit card defaults are becoming a growing concern, with rising debt and inflation contributing to financial strain for many Americans. The consequences of defaulting—ranging from damaged credit scores to collection actions—can have long-lasting effects on an individual’s financial future.

However, it’s not too late to take action. By proactively contacting your bank, negotiating debt, or seeking assistance from credit counseling services, you can minimize the damage and regain control of your finances. Being mindful of your spending, making at least the minimum payment, and exploring hardship programs are crucial steps to avoid default and protect your financial well-being.