Understanding Credit Card Defaults: What to Expect and How to Recover

A selection of VISA and Mastercard credit cards displayed in Buffalo Grove, Illinois, on February 8, 2024

NEW YORK (NB360) — Credit card defaults among Americans have climbed to their highest point in 14 years. From January to September 2024, U.S. credit card defaults surged to a record $46 billion, as reported by the Financial Times, with data analyzed by BankRegData.

Due to significant credit card debt and high inflation, many consumers are struggling to meet monthly payments, resulting in defaults.

A borrower defaults when they miss credit card payments for over 180 days, or about six months. This prolonged non-payment typically leads banks to conclude that a borrower will not repay the debt, explained Matt Sotir, a financial advisor with Equitable Advisors in New Hampshire.

Defaulting on credit card debt can severely impact credit reports, affecting one's ability to borrow money long-term, Sotir noted.

“These debts have significant consequences, and people often underestimate the broader impact of missing a payment,” Sotir added.

Here’s what you need to know about credit card defaults.

What does it mean to default on a credit card?

Failing to make credit card payments leads to various consequences. Initially, there are late fees, increased interest rates, and potentially lower credit scores. If a borrower misses payments for 30 days, the bank labels the credit card as “delinquent,” further damaging the borrower’s credit score.

After about six months of missed payments, the bank considers the credit card in default, closes the account, and refers it to a collection agency, according to Chip Lupo, a writer at WalletHub.

“At this point, obtaining future credit becomes very challenging,” Lupo stated.

When a collection agency takes over the debt, they will contact you via phone, email, and mail to urge payment. If unpaid, the agency may pursue legal action against the borrower.

What should I do if I default on a credit card?

Sotir advises being proactive. Whether contacting your bank or consulting a financial advisor, the sooner you seek solutions, the more consequences you can avoid.

“In my experience, when someone faces financial trouble, they often withdraw and avoid dealing with it,” Sotir said.

Sotir and Bandebo suggest negotiating with your credit card company, as it benefits the bank to help you catch up. If your account is with a collections agency, inquire about payment plans or seek help from a nonprofit credit counseling organization or financial advisor.

How can I avoid defaulting on my credit card?

Ideally, you should pay your credit card balance in full each month, but if that’s not feasible, at least make the minimum monthly payment to avoid deeper debt, advised Rikard Bandebo, chief economist at VantageScore, a credit modeling firm.

“Do everything possible to avoid advancing to the next stage. If you’re 30 days late, strive to prevent reaching 60 days and absolutely avoid defaulting,” Bandebo urged.

If making payments is difficult, Bandebo recommends contacting your bank to discuss a payment plan.

Other options include seeking help from a credit counseling organization or transferring your debt to a 0% interest card, though this usually involves a fee.

How does credit card default affect my credit score?

Defaulting on a credit card significantly impacts your credit score, limiting future borrowing capacity and increasing costs. Missing a payment for a month can drop your credit score by 60 to 100 points, noted Bandebo. While there's no specific point drop for defaulting, it remains on your credit report for seven years, Bandebo added.

Bandebo likens credit scores to reputations; they take time to build but can be damaged quickly.

“There are no quick fixes for missed payments or defaults; it’s not as simple as flipping a switch,” Bandebo said.

What if I can’t pay?

If you can’t consistently pay your credit cards, Sotir suggests reviewing your budget to identify expenses you can cut or considering additional income sources.

“Understanding your income and expenses is crucial for most people,” Sotir added.

If expenses exceed income, Sotir recommends considering a temporary second job, selling assets, or seeking family assistance while you recover. Some banks also offer hardship programs for those struggling with large, high-interest credit card balances.

Bankruptcy should be a last resort after exploring all other options, Lupo added.

If your budget doesn’t permit resuming payments, Bandebo advises seeking alternatives promptly.