- 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 ofcardholders defaulting on credit card paymentsis 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 forStep 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 ofGood Financial Cents. At this point, credit card issuers willcharge offyour debt, meaning they write your account off as a loss for the company.
When does a credit card go into default?
A credit card will typically go into default when you have failed to make payments for an extended period, usually 180 days or six months.
Consequences of a credit card default
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 adebt 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 yourcredit reportwill 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.
Increased interest rates and penalties
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.
Causes of credit card 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.
Missed payments
One of the first and most important signs of future default is missed payments. Another can being only able to pay the minimum amount due on your credit card each month, Rose says.
High credit card balances
Stewart adds that relying on credit cards to pay everyday expenses or undergoing sudden financial emergencies that lead to carrying a high monthly credit card balance and not being able to pay it off can lead to defaulting.
Financial hardship
A sudden reduction in income, such as from a job loss or sudden illness, can also lead to defaulting.
"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 prevent credit card default
Paying more than the minimum due
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.
Reducing credit card balances
If you find yourself carrying a balance every month, start working on reducing the balance, paying the credit card off every month, or carrying a balance that is less than 10% of the credit card limit — if you must carry one at all. This will protect you against defaulting and also help with your credit utilization.
Monitoring your credit report regularly
To avoid default, it's also important to monitor your credit reports regularly, 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.
How to recover 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."
Build positive payment history
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 the best credit-builder loans don't require any credit scores to qualify.
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.
Seek credit counseling
After experiencing a default, you may want to seek credit counseling to review your other credit obligations and create a plan for repayment or negotiate with creditors so you do not default on any of your other bills. A credit counselor will also help you set up a budget and review your spending habits, so you have a concrete financial plan moving forward.
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, "It's all about learning from the experience and moving forward with smarter financial habits."
Frequently asked questions about credit card default
What should I do if I'm struggling to make credit card payments?
If you are struggling to make credit card payments, you should contact your creditors immediately and try to negotiate a payment plan, reduced payment amounts, or even a reduced interest rate to make your payments more affordable. Remember, the creditor would rather work with you to get the bill paid than have you default.
How long does a credit card default stay on my credit report?
A credit card default will stay on your credit report for seven years, but you can start rebuilding your credit by building a positive payment history immediately.
Can I recover my credit score after a credit card default?
Yes, you can recover your credit score after a credit card default. You will need to focus on paying all of your other bills on time every month and decrease your credit utilization if it is high.