Yikes! I Can’t Pay My Credit Card Bills!
What to do when you can no longer afford your credit card minimums
Credit cards are marvels of convenience, security, even rewards. Add those typically low monthly minimum payments and these little plastic rectangles serve as passports to the land of instant wish fulfillment.
But what happens when satisfying our impulses overwhelms our ability to pay? What happens when — gulp — just meeting the minimum payments is beyond our means and you’ve decided you can’t afford to pay your credit card bills?
Just this: When fiscal reality derails our dreams, it’s time to take action. Smart, purposeful, life-changing action.
“The longer you wait to address a credit card problem, the costlier your situation can become,” says Bruce McClary, National Foundation for Credit Counseling Vice President. “Falling behind on your payments can lead to higher interest rates, additional penalty fees and a drop in your credit score.
“All of those unfortunate consequences can have a ripple effect that places other financial priorities in danger. Although time is not your friend when you are in a credit crisis, you should never think it is too late to reach out for help.”
Rally time. What are we taking? Action. When are we taking it? Now.
Troubling Trends for Vulnerable Consumers
Generally, consumers with credit cards are getting along much better than they were during the turbulent years of the Great Recession. As jobs and real wages surge, we’re taking on debt at a record pace, reflecting our newfound confidence and optimism. Gratifyingly, we’re generally handling it well.
This includes Americans’ management of credit card debt. At the end of the third quarter in 2018, the overall rate of credit card delinquencies was just 2.54%, a figure Wolf Street called “soothing.”
But that number, driven by the 100 largest commercial banks, camouflaged a worrisome trend among America’s 4,705 smaller banks, where delinquencies rose to 6.2%, higher than the peak of 5.9% for these banks during the financial crisis, according to the Federal Reserve Board of Governors’ November report.
The credit-card charge-off rate — the point at which a bank declares a debt uncollectible, possibly selling it, at a discount, to a collection agency — for smaller banks was 7.4%. That is the fifth straight quarter above 7%. Even during the financial crisis, smaller banks never suffered a cold streak like that.
This is worrisome because, while big banks are skimming the cream of consumers, smaller banks are the ones issuing credit cards to higher-risk borrowers. And these borrowers, the numbers suggest, increasingly are running into trouble, getting buried in late fees and penurious interest rates.
These hapless borrowers, perhaps, make up of the nearly one in five Americans who told Gallup surveyors in April 2018 they worried about being able to meet their monthly credit card minimums.
Ultimately, some simply will default — that is, turn their backs on their debts – ignoring what awful, lasting impact it has on their credit rating.
Don’t let this be you. There are better ways to cope, survive and, ultimately, overcome.
Consequences of Not Paying Your Credit Cards
Listen, it happens. An emergency expense pops up. You get waylaid by a medical emergency or natural disaster. The federal government shuts down for more than a month. Or maybe you simply overshot your budget. Whatever the reason, nothing good comes from failing to pay credit card bills. It’s all there in your issuer’s agreement.
Just to ratchet up the horror: If you’re behind on your payments, don’t even think about trying to cash in on your rewards miles or points.
Paying late can trigger a late fee, as much as $25 for a first offense. And it’s tacked right onto your balance, giving you even more to pay back. Subsequent late payments can result in still-higher fees, all the way up to $35.
The good news is, a late fee cannot be higher than the minimum payment due. If you’re late on a $10 minimum, your late fee cannot exceed $10. Accordingly, many credit-card issuers set their minimum payments at $25 or more.
Impact on Your APR
Another reason to stay current: Accounts that slip past 60 days in arrears incur harsh interest rate increases, up to 30% in some cases.
That’s bad, right? Worse, your agreement may stipulate, although you will qualify for an APR rollback on pre-penalty purchases if you make on-time payments for six months, the penalty rate can continue on new purchases indefinitely.
If you’re juggling credit card bills, some things to keep in mind:
- Some card issuers do not have penalty rates as part of their agreements. Review your agreements to see if that is the case with any of your cards.
- If you have a zero-interest card, make certain you keep it current, or you may lose your introductory rate.
- If you have more than one card from an issuer in your wallet, being late on one of those cards can wind up boosting the APR on the others.
Credit Score Impact
Along with fees and higher APRs, late or missed payments can lower your credit score. Interestingly, card issuers and the credit reporting bureaus have different definitions of “late.” While the creditor can instigate fees and other charges on the first day past the due date, your account is not late in the eyes the credit bureaus until 30 days have lapsed.
Timely payments account for 35% of a consumer’s credit score, so late payments can extract a substantial penalty. Someone with an otherwise pristine record could get docked as much as 100 points for a single late payment. Those with less-stellar credit histories lose fewer points for late payments; unreliability already is baked into their scores.
MyFICO.com lays it out clearly: Additional late payments, as well as payments that go 60 or 90 days or longer past due, can slam a credit score, as can entering into debt settlement (where the creditor accepts less than the full amount owed).
The ‘Partial-Payment’ Myth
Credit-card issuers do not award prizes for participation. That is, they won’t absolve late-payers for sending something less than the minimum due. Absent prior arrangements, your creditor will regard a partial payment essentially the same as a late payment.
A caveat: Several partial payments that equal or exceed the minimum and arrive before your due date will maintain your good standing.
Charge-offs happen when the card-issuer concludes a debt cannot be collected, which usually happens when an account is 180 days in arrears — that is, six months without a minimum payment. A charge-off allows a creditor to claim a tax deduction for a bad debt; this, however, doesn’t mean the debtor is off the hook.
The issuer may continue to pursue what’s owed through a collection agency, or it may sell the account at a deep discount; you, however, will remain on the hook for the full amount.
If your debt is sold, be absolutely certain — if you’re willing and able to make payment arrangements — you’re sending money to the actual new owner of your account. Collection scams abound, preying on unwitting debtors.
Also, you can count on your credit score getting a black eye that will linger for up to seven years. A charge-off, coupled with the record of missed payments, will make it tough to qualify for new credit, from mortgages to auto and personal loans to new credit cards. You might still get one, but it will come with a very high interest rate.
There’s also this to consider: If you’re able to negotiate a settlement for less than the original amount owed, you could be liable to the IRS for the amount forgiven. Check with an income tax expert about the ramifications.
In short, regarding charge-offs, you absolutely do not want to go there.
Alarming Recourse: Debt Collectors, Lawsuits, Garnishments
Rest assured: Once they’ve acquired the rights to your debt, collection agencies will pursue you. It’s what they do.
While they are limited by law from outright harassment, threats or making false statements, collection agencies will be persistent, to a point, contacting you in a variety of ways: telephone, text, email, regular mail — until you tell them, in writing, to knock it off. A cease-and-desist letter sent via certified mail is the best way to stop communications.
After that, you likely will hear from them only twice: Once to tell you they’ll stop making contact, and once to tell you (or your lawyer, if you’re represented in the matter) they’ve filed suit in an attempt to recover the debt.
If you do receive a court summons, put it on your calendar. Failing to appear for a court date means you automatically lose.
If the card issuer or collection agency wins a judgment at court — that is, the judge orders you to pay up — the result will be reported to the credit bureaus, sinking your credit score.
If you’re ordered to pay, you could have your wages garnished and/or your bank accounts frozen. Additionally, you could be charged for the legal fees incurred by the card issuer or collection agency for the actions required to attempt to collect.
Where, and How, to Get Help
Maybe most of everything discussed above is well known to you. Been there, done that, still owe on the T-shirt. What you need is a hand up. Let’s do this.
The good news is, there are actions, immediate, intermediate and long-term, you can take to get yourself righted. Beginning here:
Contact the Card Issuers
Rule No. 1 is, you let your creditors know you’re in financial trouble. Explain your situation. If you have a hardship — you’ve been laid off, or run into unexpected expenses — they’re more likely to cut you some slack if you lay out the facts. Even if it’s merely an overspending problem, if you’ve been punctual until now, you may be smiled upon.
“They may be able to give you a little relief while you get your financial situation in order,” McClary says. “But if you don’t ask, you will never know what they can do to help you avoid falling behind on your payments.
“While there is no guarantee how they might be able to help, it’s possible that they might allow one month of an interest-only payment or even permission to skip a payment.”
You won’t be the first distressed customer ever to contact your creditor. Ask what they typically do for others in your predicament.
While you’re at it, try to bargain for some leniency. Sending a partial payment without explanation won’t help; offering to do so while talking with your creditor’s representative just might.
As you attempt to work things out, do not make promises you cannot keep.
Get Outside Assistance
Experts rarely go it alone. Top pro golfers rely on coaches. So do the best tennis players, Pro Bowl quarterbacks, and All-Star baseball players. Presidential candidates lean on all sorts of strategists.
Why shouldn’t people who are unsuccessful at managing money, recruit experts, too?
“Talk to a personal finance expert like a nonprofit credit counselor,” McClary said. “They can give you personalized guidance that helps get you past your credit card challenges and back on track toward your financial goals.”
No less than federal government watchdog Consumer Financial Protection Bureau agrees, adding, “Before you sign up, ask if you will be charged, how much, and what services will be provided.”
Avoid for-profit debt-relief companies, and run if you hear any of the following:
- Fees charged before your debts are settled
- Guarantees they can make your debt go away
- You’re advised to stop communicating with creditors
- You’re told to stop making minimum payments
Just as Marie Kondo holds her clients accountable for committing to declutter their lives in pursuit of freedom and joy, so will enrolling in a debt management program with a nonprofit credit counselor guide you from your mountain of debt clutter toward financial freedom.
Considering the B-Word: Bankruptcy
Think hard on this one, because once you commit to bankruptcy, the hangover will linger for a while — seven years if you choose Chapter 7, a straight bankruptcy in which most of your assets are liquidated to meet your debts, and the rest are discharged; 10 years if you choose Chapter 13 reorganization, in which you come up with a plan to repay your creditors, through an intermediary, over three to five years.
Bankruptcy, says Denver-based Latitude Financial Group partner Dan Grote, “is a last-resort kind of situation, but it is appropriate for some situations and it does not mean you’re a deadbeat. It’s a do-over that is appropriate when there is really no other alternative.”
Scrutinize Your Spending; Reevaluate Your Budget
You do have a budget, don’t you? If not, you can set one up using any number of free apps or online budget programs. The key, says Portland, Ore.-based money coach Cecilia Case, is “Stop the bleeding. … [People] need to find a way to stop getting themselves into more debt.”
Along that line, Alexandra Tran, a financial blogger and digital marketing specialist with a national e-commerce and logistic company, encourages being obsessed with your bank accounts. She tracks hers daily using Credit Karma and banking apps.
“When I see my money,” Tran says, “I know when I shouldn’t be spending.”
Accordingly, this would be a good time to comb through your credit card and bank statements for automatic payments for subscriptions you rarely use, or could do without. It’s also a good time to take a hard look at where else your money goes.
“Ultimately, winning with money comes down to playing good offense, good defense and the special teams — that’s tracking,” Grote said. “You achieve what you track.”
Adding Income Streams
Along with trimming your spending, be alert for ways to increase your income. Do you deserve a raise? Figure out why you deserve it (Tip: The reason can’t be because you need more money; everyone does), draft a proposal linked to your market value, and talk to your supervisor.
See where you might gain a foothold as a freelancer or in the gig economy. Explore Upwork, Guru, and TaskRabbit — to name three — that connect people looking for work with those who need jobs completed.
“It’s best to freelance in an area in which you have experience, but it’s not essential,” says Priyanka Prakash, a senior staff writer at New York-based Fundera. “You can start by charging a low hourly rate to attract clients. If you do a good job, you’ll get good client reviews and can raise your rate.”
“There are some amazing ways of clearing debts and sorting out your finances,” says Wiltshire, UK-based financial blogger (ibeatdebt.com) Vicky Eves, “so don’t get stuck in a rut thinking you are limited to one or two options!”
What Eves did is truly novel, appearing on a TV gameshow and winning enough to erase half her debt. Unconventional, sure. Out-o’-the-box? Absolutely? Doable? We’ve heard worse ideas.
Have stuff to sell? From eBay to Craigslist to Poshmark and beyond, there never has been a better time for getting top dollar for things you can live without.
Above all, do not withdraw. Ducking creditors’ contacts makes your financial matters worse. Avoiding contact with regular folks can lead to depression and feelings of hopelessness.
“There is a lot of stress that comes with financial hardship so it’s also important to do things to keep up your spirits,” says New York-based Olga Kirshenbaum, owner of Rags to Riches Consulting. “Attending networking events and volunteering can be ways to continue to stay engaged and connected, maybe can lead to your next job.”
You can get back on your feet. And you probably can do it faster than you thought possible. Take action, reach out, consult experts, stay connected, and take control. You’ll be amazed where you are this time next year.
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