Sometimes it’s tempting to skip a credit card payment; you may be going through a tough month and need to skip just one payment. There are other times, however, when your finances are hit by a large unplanned expense, such as a hospital stay, or your car breaks down etc and things get really tight.
You might have wondered what would happen if you decide to put your credit card payment on hold for a while or decide to stop paying them all together. Let’s investigate this further.
Skipping one payment
When you miss just one credit card payment, your credit card company will usually charge a late fee, in addition to interest charged on the unpaid balance. Some companies even raise your interest rate as soon as you miss a payment. As a result, your next payment will include these fees plus your monthly minimum required payment. This could lead to a snowball effect so be careful and try to make your minimum repayments where possible.
30-60 days Late
After 30 days, some credit card companies offer a short grace period before they report your account as delinquent to a credit reporting agency. However, generally after 60 days, you can expect your credit card company to report your account as past due and this would negatively impact your credit score.
During this time, your credit card company may increase your interest rates to the penalty interest rate covered in the fine print in the contract you signed when applying for the credit card. This can be quite a shock to some people, as your interest rate quickly increases from a low rate to one that’s 29 percent or even higher. It depends on the card—you can find the details on your credit card statement.
After you are 90 days Late: Lowered credit limit or closed account
The longer you go without paying, the more drastic the consequences becomes. Late fees add up over time and your credit score will continue to suffer the more behind you are on your account. Eventually, your creditor may choose to lower your credit limit or even close the account, which increases your utilisation ratio, leading to an even lower credit score.
According to Credit Cards NZ, a New Zealand credit card comparison website, your credit utilisation ratio is defined as the amount of total debt you owe divided by your total available credit. The lower your credit utilisation ratio the better your credit score. For example, if you have a credit card with a $5,000 credit limit, and you owe $1,000 on your card, then your credit utilisation ratio is just 1,000/5,000 which equals 0.2. However, if you owe $5,000 and your credit limit is $5,000 then your credit utilisation ratio would be $5,000/$5,000 which is equal to 1.
At this point, the snowball only continues to grow, but it can get even worse. Some credit card companies choose to right off your debt as a bad business expense while some creditors would choose to give your debt to a collection agency.
Collection agencies can be quite aggressive when they come after you; you may receive calls at work and at home all hours of the day, even on your cell phone. They may even send you emails trying to get you to pay. If you ignore the collection agency, then they may take legal actions to force you to pay your debt.
Face debt head-on
One of the best ways to tackle debt is to face it head-on. Here are some things you can do to work with your credit card company by making a proactive steps towards paying off your debt.
Reach out to the credit company before you miss a payment. Tell them you may miss a payment, explain your circumstances and ask what you can do to avoid having the late payment on your credit report. Also ask them if there’s a way you can avoid paying the late and penalties if you end up missing a payment.
You may find your credit card company will try to work with you if you’re proactive and contact them right way. They may even have a program that helps when you miss a payment. Some credit card companies offer a “skip-a-payment” plan, where you skip one payment in a specified amount of time. Or they may offer a program where you pay only the interest due that month or a specified amount of time.
It’s better to reach out to the credit card company before missing a payment—they may just be willing to work with you to find a solution and help you avoid any bad marks on your credit report, while also avoiding high fees and penalties.
If you fail to reach out to your credit card company early, they will begin to contact you within 30 days of a non-payment. At this point, your credit card company may still be willing to work with you, but they won’t be as friendly and helpful as if you had been proactive in the beginning—before missing a payment. Even so, they’ll probably still offer to help you with the programs mentioned in earlier.
When you hit the 60-90 day mark of non-payment, it might be time to reach out to a non-profit credit counselling agency. They’ll help you develop solutions to manage your debt—pay it off—and stay out of debt.
As you can see, skipping credit card payments can be detrimental to your credit score, your finances and your peace of mind. If you find yourself in a hard situation and you’re not able to make a payment, then reach out to your credit card company right away. They may be able to help you get back on track with payment options and programs they have for people who are going through a tough time.