What Credit Card Delinquency Is—And How To Avoid It
Credit cards can be a great way to get rewards and perks for money you’re already spending—but what happens when it all goes haywire and you can’t pay your bill?
According to TransUnion’s Q4 2019 Industry Insights Report, the average credit card debt per borrower is $5,834. Though higher credit card debt rates are a sign of a strong economy supported by consumer spending, lugging around nearly six grand in debt is dangerous, especially considering 40% of Americans don’t have the money on hand to pay it off even a $400 bill in full.
And when it rains, it pours. Consumers sometimes aren’t able to make credit card payments, which starts the spiral of credit card delinquency. Data from the Federal Reserve Bank of St. Louis shows 2.61% of credit cards were delinquent at the end of Q4 in 2019, the highest rate since the beginning of 2013, mainly due to younger borrowers continuing to enter the credit market and underwriting standards continuing to loosen.
If you’re facing bills you can’t pay, don’t panic. There are steps you can take to resolve the issue and move forward without taking a huge hit to your credit score.
What is credit card delinquency?
Credit card delinquency refers to what happens when an individual doesn’t pay their credit card bill. Once an individual fails to make a payment, the process of delinquency starts.
At first, your creditor will likely give you 30 days to make your account current and not report the late payment to the three major credit bureaus. If you don’t take action within those 30 days, however, the damage to your credit score starts to elevate.
After the first few days or months of missing a payment: The credit issuer may suspend the account. Under the first level of suspension, the card will be blocked from making new purchase authorizations. According to Discover, a major credit card issuer, this can happen within the first few days up to three or four months of delinquency.
After three to four months of an account being late on payments: The creditor will likely suspend the account entirely. Through account suspension, the consumer must take action to get the suspension reversed. This action can include making the full minimum payment plus the late fee to bring the account current. If no payments can be made due to financial hardship, the creditor might be willing to work with the consumer to come up with a customized repayment plan. Consumers also have the option to work with a third-party credit counselor who will work on their behalf to come up with a plan to repay the creditor.
After more than four months of an account being late on payments: Consumers who fail to take action on their late credit accounts could face a harsh penalty after four months of failing to make arrangements on payment: revocation of their account. A credit card being revoked means the card issuer will close the account—which has detrimental effects on a credit score, especially since it will likely increase a consumer’s utilization ratio.
After card revocation: If payments still aren’t made to make the account current, a creditor will charge off the account. Under a charge off, a creditor recharacterizes the debt from an “asset” to a “loss,” and reports the state of the account to all three of the major credit bureaus. Even if an account is charged off, the consumer is still responsible for paying it back in full. A creditor may choose to send the debt to collections, instead. Either way, this is considered a significant event and will typically have a severe negative impact on credit scores.
How Credit Card Delinquency Affects Your Credit Score
The different stages of credit card delinquency will have varying effects on a credit score.
Late payments are listed on a credit report based on how late they may be. Typically, they are shown in the following categories: 30-days late, 60-days late, 90-days late, 120-days late, 150-days late or a charge off. The longer the payment is late, the more significant its negative effect on a credit score will be.
Additionally, consumers with higher credit scores will see harsher effects on their scores after a single missed payment. According to FICO data, an individual with a 793 credit score can see it drop to between 710 and 730 on the FICO Score 9 model 30 days after a missed payment; after 90 days, it can drop to between 660 and 680.
Missed payments can remain on a credit report for up to seven years. If an account ends up being charged off and sent to collections, the seven-year rule applies from the original delinquency date.
Know Your Rights If Your Debt Is Sent to Collections
If an account is sent to collections after it’s categorized as delinquent, a consumer does have rights under the Fair Debt Collection Practice Act (FDCPA). Under this act, the collector cannot harass consumers for payments by using threatening or abusive practices, and can only contact them during certain times of the day.
“Debts also have a statute of limitations, meaning that if your debt has been delinquent for a certain amount of time, the creditor can no longer take legal action against you,” says Leslie Tayne, Esq., a debt attorney in Greater New York City, specializes in helping consumers navigate their debt and resolve them with creditors. “However, even if the statute of limitations has expired, it doesn’t mean that you no longer owe the debt, simply that the creditor can no longer sue you for it.”
That being said, consumers should keep documentation to prove the statute of limitations is up, should a collector attempt to sue you for time-barred debt. Individuals should not make a payment if a collector comes after them after the statute of limitations expires; if they do, their payment restarts the clock on the statute, and the collector can legally move forward with suing you for the debt.
Tayne adds that each state’s statute of limitations differs and will be based on the last time a payment was made; additionally, some cities have their own consumer protection laws.
How to Recover After Your Credit Cards are Delinquent
There are important steps you can take to mitigate damage if a credit card account has gone delinquent. The best next step is to call the creditor to begin the recovery process.
“You can do this yourself or can consult the help of a professional, such as a debt attorney, who can negotiate with the creditor on your behalf,” Tayne says. “While doing it yourself may seem easy, the reality is there are many moving parts to the resolution of debt, which can include tax and legal consequences, as well as considerations with your credit reporting.”
Tayne adds that consumers who work directly with creditors to come up with a payoff plan should get the entirety of the agreement in writing in order to protect themselves while working through the agreement.
In terms of credit score recovery, the negative mark from a credit card delinquency will remain on a report for seven years and it’s unlikely for a consumer to have it removed from their credit report. In some cases, Tayne says contacting the creditor and asking for a favor could help, but there’s no guarantee.
“You can contact your original creditor or lender and essentially plead your case for a goodwill adjustment to have it removed if you have resolved the delinquency and since been in good standing,” says Tayne.
If the delinquency remains on your credit report, its negative impact will eventually lessen. The longer the negative mark remains on the credit report, the less of a toll it will take on a credit score.
Ultimately, recovering fully from a credit card delinquency means consumers should take a close look at their personal finance habits to help prevent falling into the same patterns in the future. That might mean reorganizing cash flow or building up an emergency fund to better shield themselves from falling behind on payments in the future.
Tips for Avoiding Credit Card Delinquency
Delinquency can be avoided if consumers are diligent with debt. Here are a few ways to avoid credit card delinquency—and the negative mark on your credit score:
Set up autopay. With the increase of different credit card options—travel, cash back, airline loyalty—it can be easy to become disorganized with bills or forget about a balance entirely. To shield yourself from unintended neglect of a credit card bill, consider putting the card on autopay. If you have multiple cards with balances and are overwhelmed with keeping track of due dates, Tally (a member of the 2020 Forbes Fintech 50 list) will consolidate your payments and make them on your behalf—often at a lower interest rate to help save you money. Note that Tally is giving you a line of credit, not just acting as a go-between or organizing app.
Stop spending on your credit cards. If you’re already treading water with your debt, putting away your credit cards will help aid in a successful recovery. If you’re struggling to make the switch from credit to debit, consider consolidating your credit card debt with a personal loan for one easy monthly payment—but don’t rack up new debt after you consolidate.
If you’re falling behind, call the creditor ASAP. Being up front with your situation from the start might give you more opportunities to work with the creditor. As soon as you realize you might miss a payment, pick up the phone and call your credit card company. Keep in mind that the company has a stake in this situation, too. Your creditor will want to avoid having to charge off the debt and characterize it as a loss, so it will likely be willing to work with you.