What Happens When You Miss a Credit Card Payment
It’s approaching the end of the month and time again to check those bills. But what if there is a little too much month left at the end of the money? Is it okay to skip a bill payment? Just one won’t hurt, will it?
Well, that depends. If it is the monthly check to repay the in-laws for the car repair, you likely aren’t going to end up killing your credit rating. But if you are thinking of taking a pass on your MasterCard bill, you might want to think again. The consequences can not only add up to extra fees and high-interest payments, it effects can last for years.
As the first due date goes whizzing by without a payment, you will get tagged with a late fee. This can be charged even if you are just a single day late, but it is capped at $27 for the first offence — much more than the Michael Jackson Tribute concert tickets that got you into this mess.
This isn’t the end of it though. After just a single late payment, the issuing company can legally raise your rate up to a maximum of 29.99 percent for future purchases. If you are the type that uses your card often and occasionally carry a balance, this single, innocent act, can end up costing you hundreds of dollars.
It can also affect your credit score. When calculating your credit score, on-time payments are the most important factor in the mysterious FICO formula.
If your late payment goes past 30 days, your account will automatically be reported to the credit bureau trolls. Once reported this late payment can stay on your credit report for up to seven years (as much as a broken mirror). While it is possible to partially make up for it through subsequent on-time payments, you will always be a step behind in the credit game.
Between days sixty and ninety, the card issuer will usually make efforts to block your account from charging new purchases to protect themselves. After the first late payment, the maximum late fee is bumped to $37 for subsequent lapses and is adjusted annually by inflation.
If you didn’t get the interest rate bump to 29.99 percent, you can bet you have it now. Not only that, the credit act also allows the issuer to legally apply the new rate retroactively to the entire outstanding balance after 90 days. If this isn’t intensive enough to negotiate a solution, you are just not reading it clearly enough.
If you are panicking and trying to find out if you having been slapped with the maximum rate, your card issuer is required to give you 45-days of notice before raising your rate. But, if you have been avoiding checking your mail lately, it could already be too late.
Month four and on
After four months, one of two things will happen, either the credit card company will decide to sue you for the balance, or they will “charge off” the credit and send it to a collection agency. If it has gone to collections, the credit card company no longer owns your account and will not attempt to contact you, but you will likely wish they could as collections will wreck havoc on your credit and track you down relentlessly.
If the credit card company goes after you directly, they can get a court order allowing them to garnish up to 25% of your income, depending on your state.
Many people each year fake their own deaths and the police give up looking for them, only to be tracked down by unrelenting collections officers.
And, even if you manage to get out of all this, you are still not out of the woods — the IRS considers non-payment of debt as ‘cancelled debt’ and requires you to pay taxes on it.
Death and taxes!
Down the road
Your credit score is like your universal ticket to most of your adult life, including any credit purchases, mortgages, and even renting apartments and mobile phone contracts. But, it is not only purchases and rentals that will gouge you, insurance rates are also tied to credit scores, and even employers are starting to take credit reports into account for job candidates. Luckily, eharmony hasn’t started requiring a credit check, although I am sure that it is just a matter of time.
Another way out
If you just can’t make your payment this month, the first thing to do is call your credit card company’s hardship department. They want you to make your payments, but would prefer a call in, rather than having to track you down. If you have a true temporary hardship — such as a layoff — your creditor may waive one or two payments, or work out a payment plan with you.
If your situation has permanently changed and you are in real trouble, you need to act fast, before you start getting the dinner-time phone calls.
- If you have a few credit card accounts or other mounting high-interest debt, consider consolidating the debts.
- Contact a debt negotiation company or individual that will work on your behalf to lower your principal balances, explain your options and develop a plan.
The Last Resort
If you have tried everything else and there is no possible way to deal with your debt, you can file for Chapter 13 bankruptcy. This still doesn’t get rid of the debt, and is generally less favorable than trying to negotiate with debtors, but can be necessary.
If you feel you are at that point, find a capable attorney in your state before you start this expensive and painful process that will impact your credit rating for many more years.
The first step
Okay, so missing one credit card payment might not get you evicted from your house and ruin your eharmony, but why take the risk? Just do the hard thing, the thing that no one wants to do and call mom and dad. Admitting that you have a problem is the first step to change and you are much better to make the call now, that from the IRS office.
Featured image credit: www.flickr.com