There are many benefits to owning a credit card. Apart from it being a good instrument for credit building, it can provide you quick access to credit and cash advances when you need it. But not many people can keep a disciplined approach to credit card management; some of them end up with accumulated debt that becomes too hard to pay off.
Considering not paying your credit card debt will cause you more trouble. In the following article, you’ll learn how credit card debts compound and how to deal with it when it happens.
What are the Causes of Credit Card Default?
A credit default can happen when a borrower misses payments or avoids repaying debt that includes principal on loan and interest charges. Most people don’t realize the impact of credit default on their credit history until it’s too late. This can result in very difficult credit applications or financial dealings for at least 5 to 7 years following the default.
Knowing the 3 major causes of default early on can help you avoid it and other financial troubles later on:
Unknown Missed Payments
You may only start to be aware of unknown missed payments when you apply for a new line of credit and you have been declined. Your credit report will show these missed payments that could come from mismanaged bills from utility services or phone contracts. For example, if you pre-terminate a phone contract, and have abandoned some fees that go with it, that could cause you $2,000 to $3,000 in unknown missed payments. The same is true when you move to another house and there is an unpaid outstanding balance in your utility services, that easily adds up to your credit default.
Known Missed Payments due to Financial Hardships
People who know the value of having a good credit record do not just decide to stop paying their obligations. But unfortunately, when they are faced with financial hardships they begin to struggle in paying their bills. Some of these instances are natural when dealing with finances, but even an emotionally devastating event can affect how a person operates mentally. These instances include: loss of a job, long-term illness, permanent disability, failed business, divorce, and death of a family spouse or family member.
Overcommitted to High-Interest Debts
If you are suffering from credit card default, then you may have way too much credit and loans that you can’t really afford. Even when the loans were granted with ease, managing multiple credits and loans will eventually take its toll on your finances.
How You Accumulate Credit Card Debt
You can easily accumulate credit card debts when:
- You don’t pay your outstanding balance each month. The interest applied to the unpaid balance will cause a spike in your next month’s outstanding balance.
- The annual percentage rate (APR) of your credit card and all your other loans go up as the prime rate dictates. This will cause a sudden ripple effect on the additional money you have to put out to pay your balances.
- You miss a payment even just for a day, a late fee is charged on your account.
- You have missed paying your balance for 60 days and thereafter, you’ll be charged a penalty APR considered to be one with the highest rate.
- You are 180 days late in your payments and your account will be turned over to the collection agency along with the accumulated fees.
What Happens When You Stop Paying Your Credit Card?
When you stop paying your credit cards you’ll have more problems to deal with that will definitely be so much harder to fix later on.
Your Interests and Late Fees Will Start to Accumulate
The amount you are due for payment every month will increase – unpaid amount plus the current month’s outstanding balance. After your account becomes 60 days past due, your interest rate will increase to a higher penalty rate.
Lasting Effect of Penalty Rate
The penalty rate is applied to your account until you have made 6 consecutive payments on time.
Collection Efforts Increase
When your account has been finally turned over to the collection agency, you will start to be bugged by endless text messages, emails, and phone calls to remind you of your credit card payments.
Credit Score and Credit Report Impact
As your credit report gets updated on a monthly basis via reports sent by your creditors to the credit bureaus, you can expect your credit score to experience a swift dive. This bad credit may linger in your credit report, ruining your ability to access future loans.
What are Credit Card Debt Forgiveness and Debt Relief Options and How Do They Work?
If you are currently deep in credit card debt, know that there are options you can exercise to minimize the damage to your credit. But it is important that you act on the matter quickly.
You may think about debt forgiveness as a 100% discharge of your debt. This isn’t true. Debt forgiveness is only a special payment arrangement or settlement with your bank before your account is turned over to the collection agency. If you are sure to miss several payments on your credit card down the line, call your credit card company and explain your situation. While you may not expect debt forgiveness early at this stage, you may be given a retrieve for the interest charges on the balance. Propose a clear plan on how you will pay your debt and stick to it.
Seek the Assistance of a Credit Counseling Agency
A credit counseling agency can help you draft a debt settlement plan and negotiate with creditors on your behalf. An example of this plan is allowing you to pay the full amount you owe for the next 3 to 5 years, with or without a reduced interest rate, while keeping your account active. Be sure to reach out only to legitimate agencies that are accredited by the National Foundation for Credit Counseling.
Negotiate with Debt Collectors
You can negotiate on your own once your account has been turned over to a collection agency. Just like with your bank, you need to be specific on how you’ll repay the debt, either on a reduced lump sum amount or on installment. Study and know your rights under the Fair Debt Collection Practices so you will spot early on any unfair practices against you.
Consolidate your Credit Card Debts
If the nature of your debt accumulation is due to feeling overwhelmed handling multiple accounts, then consolidating your debts in a single account may work for you. Take time in looking for the best credit card with lower rates to make the balance transfer.
File for Bankruptcy to Discharge the Debt
If you have exhausted all options and are certain that you can’t pay what you owe, then filing a bankruptcy may be the right move for you. There will be huge consequences of this move on your creditworthiness that will drag you for years, so be sure to seek the assistance of a bankruptcy lawyer before going through with it.
How Can You Avoid Accumulating Credit Card Debt?
These simple tips are the most important strategies financial experts recommend if you want to avoid accumulating credit card debt:
- Set a strict spending budget
- Always pay more than your minimum amount due each month
- Keep a low debt-to-credit ratio
- Improve your credit score to gain bargaining power for lower interest rates
- Avoid too many loan accounts
Debt accumulation doesn’t happen overnight; it is a result of a series of bad credit behaviors that you can actually monitor, control, and avoid. If you are already in a similar situation, know that if you make the right choices now it will help lessen the negative impact on your credit.