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- Credit card defaults occur when you don't pay your bill for an extended period, usually 180 days.
- Defaults hurt your credit score as your bank closes your card and sends your debt to collections.
- You may prevent defaults by communicating with your creditor to establish a payment plan.
Credit cards are a valuable way to pay for expenses over time. However, it's very easy to accumulate high enough debts that you cannot make monthly minimum payments.
Over 15 million people default on credit card payments each year for various reasons, including job loss, healthcare debt, and marital disruption. According to the Federal Reserve, the rate of cardholders defaulting on credit card payments is rising. If you default, it's important to understand the consequences, how to recover, and how to avoid defaulting again.
What is a credit card default?
A credit card default occurs when a cardholder fails to pay their debt for an extended period, typically 180 days, says Mark Stewart, Certified Public Accountant for Step By Step Business.
When a credit card company finds that someone is in default, it's like they are saying, "We give up on expecting regular payments from you," explains Jeff Rose, a CFP and founder of Good Financial Cents. At this point, credit card issuers will charge off your debt, meaning they write your account off as a loss for the company.
What happens if you default on a credit card?
Credit card default can have serious consequences. For one, your credit score will drop significantly. This happens for several reasons.
Delinquency on your credit report: While a credit card default occurs once your payment is over 180 days late, the consequences of a missed payment start far earlier. While a debt is technically delinquent immediately after its due date, creditors generally only report late payments once they're 30 days overdue. With every additional 30 days, a late payment's impact on your credit reports compounds. Your credit score will have dropped significantly by the time you've hit 180 days.
Debt in collections: When a debt is 180 days late, creditors generally send your debt to a debt collections agency. The existence of a debt in collections is already its own consequence. The collection agency "will be on your case to recover the money. It can even end up in court if things get really messy," Rose says. However, the existence of debt in collections on your credit report will further hurt your credit score.
Closed credit account: When you default on a credit card, your card issuer almost always closes your account. This affects your credit by limiting the total amount of credit available to you. A lower credit limit makes it harder to maintain a low credit utilization ratio, which is necessary for a good credit score.
With such a hit to your credit score, you will have trouble obtaining loans and opening credit cards in the future. If someone who has defaulted can access new lines of credit, they will likely pay a higher interest rate, Stewart explains. These negative consequences can persist for years after the cardholder pays off their credit card balance and is no longer in default.
Moreover, if you've consistently demonstrated to a credit card issuer that you are not a responsible borrower, they may simply blacklist you from further lines of credit.
How can you tell if you are headed for default?
There are usually signs that someone is heading for default. If you find yourself "walking a financial tightrope, it's a sign you might be heading toward a default," Rose says. Some warning signs that a default may be on the horizon include only paying the minimum amount due on your credit card each month, maxing out credit cards, and choosing which bills to pay each month, Rose says.
Stewart adds that relying on credit cards to pay everyday expenses and a sudden reduction in income, such as from job loss, are other signs someone may be headed for credit card default.
"If you see these red flags, it's time to hit the brakes" to avoid default, Rose says. He suggests setting a budget to rein in spending. "Talking to a credit counselor to help you craft a plan to dodge the default bullet," Rose says.
What should a cardholder do if they default?
Sometimes, defaulting on a credit card cannot be prevented. If this happens, Rose says not to panic. Working with your credit card company can help minimize the impact of a default.
If you do default, Stewart says that it is crucial to contact your card issuer as soon as possible. Rose adds that after defaulting on a credit card, "It's all about damage control and trying to find a way to manage the debt without sinking further."
When a cardholder defaults on their debt, the credit card company usually closes that account. Sometimes, a card issuer may permanently blacklist you from using their services, even if you recover financially.
How to avoid defaulting on credit cards
Financial circumstances can change quickly. To steer clear of default, Rose suggests always paying more than the minimum balance due on credit cards each month, keeping a careful eye on spending habits, and building an emergency fund so unexpected expenses don't push you toward default. "It's all about being proactive with your finances," he says.
To avoid default, it's also important to "pay attention to your credit card statements, prioritize high-interest debts, and consider debt consolidation if you have multiple cards with outstanding balances," Stewart says.
Can you recover financially from a credit card default?
The good news is that your credit is pliable, so you'll bounce back from a credit card default eventually, as long as you don't fall into default again. However, the recovery process will take several years. "The aftermath of a default can linger for quite a while, unfortunately," Rose says, remaining on your credit report for up to seven years. "It's like having a financial shadow following you around for years."
To rebuild your credit, you'll need to build a positive payment history on top of your negative marks. While you may not qualify for traditional loans with a post-default credit score, plenty of credit-builder loans don't require any credit scores to qualify. You can find our guide on the best credit-builder loans here.
Using a rent reporting service to report your rent and utility payments to the credit bureaus is also an easy way to build credit using payments you already make. The best rent reporting services can report up to 24 months of prior payment history.
Rose says that while defaulting on a credit card "can feel like a financial apocalypse … it's not the end of the world." He explains that "It's all about learning from the experience and moving forward with smarter financial habits."
Credit card default frequently asked questions
Can I apply for a credit card I defaulted on?
If you default on a credit card, that credit card issuer may bar you from any other lines of credit, even if you've rebuilt your credit.
Is defaulting on a credit card a crime?
No, defaulting on a credit card is not a crime. However, a creditor may sue you for late debt.
What's the difference between a delinquency and a default?
The difference between a delinquency and a default is the severity of your missed payment. Multiple delinquencies can result in a default.