A credit card default occurs after a cardholder fails to make the required minimum payments for an extended period, typically 180 days or more. Although not ideal, it is more common than you may think.
Almost half of Americans have credit card debt, and as many as two in three card holders say their debt is unmanageable, according to H&R Block’s 2024 Outlook on American Life Report. In fact, the percentage of credit card defaults has hit an all-time high in 14 years, amounting to $46 billion in just the first nine months of 2024.
If you have a credit card in your wallet, this is what you need to know about credit card defaults and how a default on credit cards can impact your overall credit.
What is a credit card default?
The meaning of a credit card default is when you stop making the required minimum payments on your credit card for a certain period of time, typically 180 days or more. The credit card company generally reacts with late fees and penalties, and you could face higher interest rates.
When a borrower fails to pay for 30 days, the account is considered delinquent. After credit card delinquency comes the default stage, which typically occurs after six months of missed payments.
What happens when you default on a credit card?
After you have failed to make the minimum payments in the required time, the creditor may close your account, writing it off as a loss before selling it to a debt collection agency. This typically happens after 180 days, but this timeline can vary, depending on your credit card provider.
The debt collection agency then has the option to pursue legal actions against you in order to resolve the debt. It usually reaches out to you via phone, email or mail to notify you of the debt and request payment. If you fail to pay, the debt collection agency can pursue legal means, such as wage garnishment or a lien on your assets.
There are other consequences you may face, as well.
Consequences of defaulting on a credit card
In addition to debt collection, there are other repercussions you may face when you default on your credit card.
- Loss of credit: Your credit card provider usually closes your account after failure to pay for a certain period of time. This results in a loss of credit, rendering your credit card useless for additional purchases.
- Collections: You may be assigned to a debt collection agency that can pursue you for the balance owed. They can even take you to court if you do not pay.
- Damage to your credit report: A credit card default is noted on your credit report, with late payments generally reported after they are 30 days overdue. There are long-term consequences for credit card defaults, too – it can affect your credit score for seven years, impacting your ability to get a loan in the future.
- Additional interest and penalties: You may face higher interest rates as a result of missed payments. You may also be charged late fees and other fees, adding to your overall load.
How to avoid defaulting on your credit card payment
There are some things you can do to avoid a credit card default:
- Pay more than the minimum: This will help you reduce your total balance that much sooner, saving you money in interest and leaving less for you to pay.
- Build an emergency fund: You never know when life may throw you a curveball, so it is important to set up an emergency fund for unexpected expenses so you do not have to use a credit card.
- Watch your spending: Don’t spend more than you have. Create a budget to help you take control of your debt and stay on track.
What to do if you default on a credit card?
If you default on your credit card, you have a few options.
You can pay it off
If possible, it is best to pay off your debt so you can avoid any further damage to your credit score. You may be able to work out a payment plan that makes your debt more manageable, such as a weekly or monthly plan.
If you have multiple credit cards, you might be able to qualify for a debt consolidation loan. This allows you to consolidate your credit card debt into a single loan with just one payment.
If you cannot qualify, consider borrowing money from a family member or trusted friend. With a loan, you can save yourself the extra interest and get rid of your debt faster.
You can settle
You may be able to settle your debt for less than you owe. Contact your creditor to see if settling is an option for your particular debt, as the creditor may accept a lower amount in order to close out the account. If not, you may qualify for a short-term hardship program that offers lower payments for a limited time.
You may also be able to work with a debt settlement company that works on your behalf; however, be sure to screen these companies carefully so you can be sure to choose a reputable, legitimate option.
You can file for bankruptcy
Bankruptcy is an option that should be saved as a last resort if all other options fail.
Chapter 7 and Chapter 13 are the two common types of bankruptcy. Chapter 7 uses the sale of your assets to resolve your debt, while Chapter 13 uses a repayment plan paid out in installments over the course of three to five years.
If you qualify, bankruptcy is a way to stop debt collectors from pursuing further actions against you, such as wage garnishment or legal action. You may even have some of your debt discharged – Chapter 13 bankruptcy cases have a 96.8% success rate for discharging unsecured debts like credit cards.
You can also benefit from the help of a credit counseling agency that can help you learn to better manage your credit cards and follow a budget so you do not risk bankruptcy again.
However, bankruptcy has its drawbacks. It can hurt your credit score and stay on your credit report for seven to 10 years, greatly impacting your ability to get a loan or line of credit in the future. With Chapter 7 bankruptcy, you may lose your assets, such as your home or car, and you will likely incur additional costs that can add to your financial obligations.
Before filing for bankruptcy, carefully consider your other options to see if there is an alternative that will not have such steep consequences.
How to improve your credit after defaulting on your credit card
Outstanding debt can wreak havoc on your credit score, but there are some things you can do to help improve your credit that much sooner.
- Make timely payments. Payment history impacts your credit the most, accounting for 35% of your score. Be sure to make at least the minimum payment on time each month.
- Get a secured credit card. A secured credit card uses a deposit upfront as collateral for your line of credit. It is designed for those with fair or bad credit, allowing you to establish a regular payment pattern so you can begin rebuilding your credit.
- Keep balances low. Just because you have a particular credit limit doesn’t mean you need to spend it. Amounts owed account for 30% of your credit score, so be mindful of your credit utilization ratio and do not stack high balances on your credit cards.
- Work with a credit counselor. You will be required to work with a credit counselor if you file for bankruptcy, but it is still a good idea even if you do not. A credit counselor can help you develop a repayment plan and negotiate a possible settlement while helping you learn critical money management tips so you can avoid debt again in the future.
The bottom line
Credit card defaults occur after a series of missed payments, typically over 180 days. Not only does this affect your credit, but you could also find your debt growing due to additional penalties and interest. Just because you have credit card debt does not mean you don’t have options. Consider a secured credit card or working with a credit counselor to build healthy spending habits so you can avoid mounting debt in the future.
