In North America, debt is a serious issue, particularly concerning unsecured credit card debt. Unfortunately, credit cards can be as burdensome as a useful economic tool. The responsible use of a credit card (paying your bills in full and on time) can improve your credit rating, which strengthens your credit record and makes it easier to obtain new credit in the future. Even being irresponsible with your credit cards (missed or late payments) has many consequences, which could lead you to a mountain of debt. And once you are under this mountain, it can be tough to climb.
So what are the consequences of stopping credit card repayment completely? If you are already a credit card user, you will know that by making at least the minimum monthly payments, you will avoid the worst of these problems. But if you are reading this article, it is possible that you have already stopped payments or are about to stop paying. We understand how debt problems can easily and quickly become uncontrollable. That said, if you start to default on payments or are about to default, it’s important to be aware of the consequences.
What does it mean to be in default?
The term “default” means that a person has breached an obligation. In this case, we are talking about the conditions dictated by the contractual agreement for your credit card. Although almost all types of credit cards have very thin clauses that must be read into their contract, the basic rules still apply. As a cardholder, you must make at least the minimum payment (even if you still have to try to pay in full, if possible) before the due date, without exception, to avoid a penalty. Once you have fulfilled this obligation, you can continue to use this credit card until your next bill is there.
Again, if you miss paying, even if this payment is only a few days late, you do not respect the terms of your contract and are therefore in default. It’s not a good idea to let you go into default mode, because once you’re there, you could find yourself very quickly in a difficult situation.
Late and missed payments
So what happens when you start to miss payments on your credit card? Not much at first, at least, that’s what we say. Even if this is only a late payment or shortened. Since mortgages are so expensive, your mortgage lender, especially if it’s a bank, will start to worry. If you stopped making payments, it would cost them a lot of time and money to recover their losses. They must act quickly and ensure that their investment is secure. So, if your mortgage payments are in default, you’ll know it fast.
Credit card companies deal with late or missed payments all the time. Because these are big businesses, a borrower who forgets to make a single monthly payment will not bother them much, at least not initially. It will sometimes take multiple missed payments before the company begins to actively contact you, asking you why you are in default and if you intend to pay. This is why many credit card users do not take the consequences of a payment default until it is too late. Suppose you do not make automatic payments or transfers through your bank (we recommend doing so if you have enough funds). You will receive your credit card bill, but with everything you have to do, you even forget to respect the minimum payment. You will be charged a late fee which, depending on the company that issued your card, maybe $ 20 to $ 30 in some cases. The penalty notice will only appear on your next credit card statement. Remember that each credit card company operates differently in managing its defaulting clients.
But when you default, your interest rate sometimes goes up to 5%.
Over the long term, these interest increases can weigh heavily on your finances and cost you hundreds, if not thousands, of dollars over the next few years. As your debts accumulate, you could pay a $ 5000 credit card bill after about 65 years. This could represent $ 22,000 interest! A credit card is now required to include agencies in their statements information indicating the amount you may have to pay if we do not make the minimum amount.
What happens to your credit report and your rating?
Some of the worst damage caused by late payments will be related to your credit report and credit rating. Again, credit card companies will not immediately report a single missed payment to Canada’s two major credit reporting agencies, Equifax and TransUnion, especially if they are paid within 30 days. If you were able to manage to pay your bill late, your interest rate might increase slightly, but your credit rating will not be immediately affected. However, if you already have a past payment history, or if you exceed the 30-day limit (which may mean you missed two payments in a row), that’s when the situation begins to deteriorate. As a result of the second overdue payment, credit card companies will be increasingly likely to report their activity (or lack thereof) to the credit reporting agencies. Again, depending on how your card company operates, even after 30 to 60 days of late payments, they may leave you room for maneuver, even if some companies will not. But, at the end of 90 days, or three missed payments later, all bets are open, and the breach of your agreement will be reported. As mentioned, the fines are not the only consequences that will happen. If your default is reported after the 30-day limit, your credit rating will be significantly worse or worse if it is near or above the 90-day limit.
Once you have stopped making payments on your credit card for a long time, your credit rating will decline. Credit card debt is identified by an “R,” which means renewable. For example, if you have paid your bills on time, your bill will be R-1 for this account. However, if your payments arrive with 31 to 59 days late, your bill will go to an R-2. Believe us, it may not be that bad, but it’s certainly not good. In addition to all this, a late notice will appear on your file, where it will stay for 6-7 years, and your credit rating will suffer. Why is it so wrong? Well, your credit rating and your credit report are specific facts for the future. The health of your credit rating is not only a tool that lenders use to calculate the interest rate they will give you, but it will also make a big difference as to whether you will qualify for the product in the first place. In other words, the lower your credit rating, the lower your chances of getting approval.
Lenders will review your file, see that your credit rating and credit rating have deteriorated and will conclude that you represent a risky investment, which could result in you being denied a car loan, mortgage or another type of credit, which you could desperately need in the end. But it will also make a big difference as to whether you will qualify for the product in the first place. In other words, the lower your credit rating, the lower your chances of getting approval. Lenders will review your file, see that your credit rating and credit rating have deteriorated and will conclude that you represent a risky investment, which could result in you being denied a car loan, mortgage or another type of credit, which you could desperately need in the end. But it will also make a big difference as to whether you will qualify for the product in the first place. In other words, the lower your credit rating, the lower your chances of getting approval. Lenders will review your file, see that your credit rating and credit rating have deteriorated and will conclude that you represent a risky investment, which could result in you being denied a car loan, mortgage or other types of credit, which you could desperately need in the end.
What happens when your account is on a collection?
To put it just, you do not want to be there. Once your debt has passed more than 30 days without being paid, you may be contacted by one of your credit card company’s collection specialists. This is a first step taken by the company before hiring a collection agency to recover its losses. An employee of the credit card company will call you to inquire about your unpaid bills. He may not be asked to be paid immediately, but you will undoubtedly be warned of the consequences of your continued non-payment. If you can make payments at this point, you must immediately negotiate with them. They may even waive some accumulated late penalties if you agree to pay more than the minimum.
Cancellation status and collection agencies
When your delinquent account reaches 180 days (6 months), your credit card company will debit your account, which means that your account has been written off and you no longer have access to credit. Once your account is written off, a note on it will also appear in your credit report, where it will remain for seven years. Potential new lenders will then see this notice, determine that you have a history of non-payment and may reject your requests. Once things have reached this point, your credit card company will probably give up trying to collect their debt.
However, the fact that the credit card company does not come knocking on your door does not mean that someone else will not do it. At that point, it will probably have sold your debt to a collection agency, which will take things back to where they were left. “Since this collection agency is now the owner of your debt, it will be legally allowed to sue you. You could start receiving phone calls at home and work. These actions can be considered as harassment at the limit. It is therefore essential to understand your rights and to know that you can contact people to prevent a collection agent from using abusive collection tactics. If a debt collector intimidates you,
If you are sued and lose, you may be subject to actions such as payroll seizure, in which a portion of your paycheck is taken, until your debt is repaid in full or equal to an amount satisfactory.
That being said, there is a limitation period in Canada, which concerns only unsecured debts, that prevents a creditor or collection agent from suing (for example, payroll seizure) after a certain number of years have elapsed. Do not make this decision as a miracle that erases your debt. Even if you can prove to the court that your debt has exceeded the limits of a creditor’s lawsuit, this will not prevent them from contacting you in the following years. Although several years have passed, the case is over, and you have managed to repair your credit,
What if your credit card debt is out of control?
First, the best thing you can do to prevent your credit card debt from ruining your financial livelihood is to be proactive and take care of yourself to the best of your ability. Even though your bank account may run out for a while, it has nothing to do with the amount you may have to pay in the event of a payment failure for too long. If you can not afford to pay your credit card bills in full, respecting the minimum payment is a temporary solution, but you should not maintain it until the end of your days.
So, if the level of your debt increases so much that you can not manage it anymore, you can also consider the following options:
Complete a consumer proposal
File a personal bankruptcy (only if you have no other choice)
Bankruptcy filing should only be considered as a last resort. However, if your debt situation is such that your finances will suffer, it may be time to start thinking about it. Remember, if the consequences of unpaid debt for a credit card can take years to materialize, they could ultimately hurt your financial health. You do not want to live in a constant state with this overwhelming debt for the rest of your life. You may not even be the only one to suffer. So, think about yourself and your family and make sure to be careful with your credit card bills.