What Happens When You Have Credit Card Debt

You’ve probably heard about it since you were a kid: credit card debt is nasty and can ruin you financially. However, what happens when you have bad credit card debt and how can it be avoided?

Credit card debt almost always starts with making a big payment (or taking out a cash advance) on your card, carrying balances over for a few months and missing some payments along the way. Before you know it, you’re owing creditors thousands of dollars and every month, late fees accrue and interest grows on the debt. You try to pay off some of it but every time you check your balance, it’s bigger than the last time. This is the reality of millions of Americans.

According to a survey conducted by CNBC in 2018, 55% of Americans that own credit cards have some debt on their cards. Furthermore, the average American household carries over a credit card balance of ~$6,700 from month to month (Nerd Wallet).

What Happens When You Accumulate Credit Card Debt?

Here’s a step-by-step breakdown of what happens when you have credit card debt and you fail to pay up on time: 

  1. After you miss one payment, a late fee is added to your balance. If you miss 2 consecutive payments within a 6-month period, you get charged even more in late fees. Note that any amount added to your balance continues to accrue interest at your APR. However, if you’ve never missed a payment prior to that and you contact your card provider with a valid explanation, the late fees may be waived.

  2. If your card has a 0% Intro APR, the offer is canceled after your first missed payment, raising your interest rate automatically. After your second missed payment, a penalty APR (up to 29.99%) is charged on your account. At this point, in addition to being unable to pay off your current balance, your debt is increasing at a whopping 30% APR.

  3. After one missed payment, your card issuer may send a report to the 3 major credit reporting bureaus. Most issuers, however, wait until cardholders miss 2 to 3 payments before doing this. Once your account is reported as delinquent, your credit score is reduced. For every month that you don’t pay, your score is damaged further. Also, the negative report will stay on your credit record for 7 years.

  4.  If you fail to make payments for more than 3 months within a 6-month period, the card provider’s collection agency will contact you to work out an alternative payment plan. To make repayment easier for you, your minimum monthly payment may be reduced.

  5. Alternatively, the issuer may choose to close down your credit card account. You will no longer be able to make purchases on the card, and your credit score reduces even further.

  6. The next step for the issuer would then be to sell your balance to a debt collection agency. These collectors are usually more aggressive than credit card companies and they have been known to harass debtors.

  7. If you still refuse to pay off your balance, a lawsuit may be filed against you. Should the court find you guilty, you’ll be ordered to pay back your debt. To ensure compliance, your bank accounts are frozen and your wages will be garnished.

  8. You may also be required to pay for the card issuer’s legal fees and any expenses they accrued while trying to collect your debt. The judgment of the lawsuit is sent to the credit reporting bureaus and it stays on your record for 7 years. This almost guarantees that you will never be able to secure a credit card in the future.

How to Avoid Credit Card Debt

Given all the late payment fees, the penalty APRs, and the damage to your credit score, it’s very hard to get out from under credit card debt. The late fees accumulate on your balance and the entire thing is subject to a high APR, making repayment even more difficult. Since your credit score is damaged, you can’t even qualify for a good balance transfer card to ease repayment.

To cut things short, it’s much easier for you to avoid credit card debt than it will be to pay it off. Here are some steps to take to avoid accumulating a big balance on your card:

Never Overcharge Your Card

When you first get your credit card, the limit is usually low. Over time, and as the limit is increased, it may become tempting to overcharge your card - don’t make this mistake. As your balance increases, the interest rate compounds and minimum monthly payments increase.

You spend a lot of your income paying off past expenses and you have little left over for your current and future needs. This is how credit card debt starts.

Avoid Long-Term Loans

Purchasing big items with your card isn’t always a bad move. In some cases, it may even be the smarter option. For example, an expense of $1,500 paid off over 4 months will end up costing you an extra $60-70. If the repayment is drawn out over, say, 2 years, it’ll cost over $300.

Take short-term loans that you can afford to pay off quickly. If it’ll take you 2 years to pay off an expense, then you can’t afford it.

Create a Monthly Payment Plan and Stick to It

You need a monthly payment plan that works with your income. This ensures that you never default on payments and that your balance never gets too big. If for some reason you build up a big balance, you need to create a new plan to repay the debt quickly.

During the repayment period, limit your spending to only basic needs in order to free up more money. If you’ve more than one card, pay off the balance with the highest interest rate first. 

Avoid Cash Advances

You should only use your credit cards to make payments. Once you can no longer withdraw cash from your bank account and you resort to taking cash advances from your credit card, you’re in financial trouble.

Create an emergency fund for rainy days and emergencies. Never withdraw cash from your credit card account.

Recognize the Signs of Credit Card Debt

There are some warning signs that you’re about to build up a big balance on your card. Recognizing these signs is the first step to avoiding credit card debt. One of them is taking out a cash advance on your card.

Some other signs are frequently applying for balance transfer cards to avoid monthly payments, using your card to pay off expensive items that you can’t otherwise afford, and maxing out multiple credit cards.

These days, with all the rewards being offered up by credit card issuers, it’s easier to build up a big balance while trying to earn rewards. Never buy items you don’t need just because you want to earn rewards. The best way to use a rewards card is to make your everyday shopping and earn rewards for doing so.

If your balance is growing too big, contact your card issuer and see if they can lower your interest rate and minimum monthly payments. The best time to do this is before you start missing payments. Finally, while paying off your debt, avoid using the card to make payments.