With unemployment remaining high, its likely that credit card defaults will remain a problem for the U.S. economy for the near future. In 2009, most major credit card company saw default rates among their customers reach figures above 10 percent. While the number of people defaulting on their credit cards has abated somewhat in recent months, the precarious state of the economy leaves the specter of more defaults lingering over the credit card industry.
Defaults hurt credit card companies, leaving them with unpaid debts that impact their bottom line. Credit card defaults also hurt the people who can’t or won’t make their credit card payments, leaving them with financial problems that can plague them for years.
When you fall behind on your credit card payments, your credit card company can hit you with a penalty rate. These penalty rates can be up to 30 percent in some cases and help put you even deeper in debt. New federal regulations have given credit card holders some breathing space, however. Credit cardholders must now be at least 60 days late on a payment before credit card companies can invoke penalty rates.
In addition to penalty rates, cardholders can also be hit with late fees if they fall behind. If the extra interest from the penalty rate and the cost of the late fees drives the cardholders’ balance above their credit limit, they may also be hit with over-the-limit fees.
Credit card default occurs when cardholders fail to make payments for a significant period of time, usually six to eight months. When credit card companies don’t receive payments for six months or more, they charge off the debts. This means they remove the debt from account receivable and submit it for collections. The card holder is still liable for the debt and will likely pay much higher interest rates and other fees associated with the default.
When a credit card account goes to collections, bill collectors will begin contacting the cardholder directly to request payment. If the creditor is still unable to pay the debt after several months, the debt is then likely to be referred to a third-party collection agency. These collectors are commonly much more pro-active in their collection efforts, and will likely frequently call you and may even call you at work or leave messages with your neighbors.
If third-party collectors can’t collect the debt, they may take cardholders to court to collect the owed amount. The cost of legal fees will be charged to the debtor leaving him or her even deeper in a financial hole. If the collection agency or creditor wins a judgment in its favor, your wages can be garnished and liens placed against your home or other property.
When you default on a credit card debt, it leaves a dark mark on your credit history that will impair your ability to borrow, and borrow at attractive interest rates for many years to come. When you default on a credit card, the credit card company reports the default to the credit bureaus. A default can significantly impact your credit score, thus making it harder for you to get a loan for a house, car or educational needs. Even if you are able to get a loan, the interest rates will be high because you’re a poor credit risk.
There are a number of ways you can avoid default, but it requires fiscal discipline and a willingness to sacrifice. For starters, if you’re starting to get behind on credit card payments, it is imperative that you contact the credit card company and try to work out a payment plan. Many credit card companies are willing to work with their customers to work out a payment plan rather than have the account go into default and being required to spend time and resources on the collections process.
Consolidating your debts may help you avoid defaulting on a credit card debt. By combining your debts all into one, you’ll most likely decrease the amount of money you must pay out each month in minimum monthly payments.
Another tactic you may employ if your credit card account is going into default is filing for bankruptcy protection. This may get much of the debt forgiven or allow you to repay it in an easier manner, but it will negatively impact your credit rating for nearly 10 years. Bankruptcy is looked at very negatively by lenders, and will significantly impact your ability to borrow and increase the interest rate you’ll have to pay.