NEW YORK — American credit card defaults have surged, reaching the highest point in over a decade. In the nine months leading to September 2024, defaults soared to an unprecedented $46 billion, as reported by the Financial Times, which analyzed data from BankRegData.
This uptick in defaults is primarily propelled by rising credit card debt levels and persistent inflation, leaving numerous consumers struggling to meet their monthly repayment obligations, thereby leading to defaults.
A borrower is deemed to be in default after failing to make credit card payments for more than 180 days, which is around six months. Financial advisor Matt Sotir from Equitable Advisors in New Hampshire explained that prolonged non-payment signals to banks that a borrower is unlikely to repay their debt.
Defaulting on credit card debt can severely impact an individual’s credit report, leading to long-term ramifications on their capacity to secure loans in the future. Sotir noted, “Sometimes people don’t realize how much missing a payment can negatively affect them in various financial areas.”
Understanding the implications of credit card defaults is crucial. When payments are missed, consequences escalate, beginning with late fees, increased interest rates, and declines in credit scores. A missed payment can lead to the account being classified as “delinquent” after just 30 days, further damaging the borrower’s credit standing. Once a borrower has been unable to pay for approximately six months, the bank generally classifies the account as being in default, resulting in account closure and referral to a collection agency, according to Chip Lupo from WalletHub.
Lupo further emphasized that once an account goes to collections, securing future credit can become significantly more challenging. Collection agencies will pursue borrowers through various means, including phone calls, emails, and letters, urging them to repay their debts. If payment is still not made, legal actions may follow.
If an individual finds themselves in default on their credit card, Sotir advises taking immediate action. Proactivity, such as contacting the issuing bank or consulting a financial advisor, is essential to explore viable solutions to mitigate consequences. “People often cocoon and avoid addressing their problems,” Sotir remarked.
Sotir and Bandebo recommend communicating with the credit card company to negotiate debt arrangements, as it is generally in the best interest of the bank to assist borrowers. In instances where an account has been sent to collections, it’s important to inquire about potential payment plans or consider enlisting the help of nonprofit credit counseling services.
To prevent credit card default, it is most beneficial if consumers can pay off their card balances in full each month. However, when that’s not feasible, making at least the minimum monthly payment can prevent further debt accumulation, according to Rikard Bandebo, chief economist at VantageScore. Bandebo emphasized, “Take every step you can to prevent moving from 30 days late to 60 days late, and absolutely do all you can to avoid defaulting.”
If payment challenges arise, Bandebo suggests contacting the bank to see if payment plans are available. Other options include reaching out to credit counseling organizations or, if applicable, transferring credit card debt to a 0% interest card—though this often incurs additional fees.
Defaulting on a credit card carries severe penalties for an individual’s credit score, which can limit future borrowing capabilities and increase costs associated with loans. Missed payments can lead to a credit score drop of approximately 60 to 100 points, as indicated by Bandebo. Moreover, a default will remain on a person’s credit report for seven years, making recovery arduous. Bandebo compares credit scores to reputations—easily built over time but easily damaged by a single error.
For those unable to meet credit card payments, Sotir suggests evaluating their budget to identify possible expenditure cuts as well as considering options for additional income sources. “It’s vital to know the flow of your finances—what is coming in versus what is going out,” Sotir added.
If expenses outweigh income, looking for temporary work, considering asset liquidation, or seeking assistance from family may be necessary steps. Additionally, some banks provide hardship programs aimed at helping individuals manage overwhelming credit card debts. Lupo advised that bankruptcy should be a last resort, pursued only after exploring all other alternatives.
Taking swift action is crucial if someone finds their budget unsustainable for meeting payments again, Bandebo reiterated.
