Credit card defaults are on the rise for Americans, reaching the highest level in 14 years. U.S. credit card defaults jumped to a record $46 billion from January through September 2024, according to the Financial Times, citing data analyzed by BankRegData.
With high levels of credit card debt and high inflation, many consumers have found themselves unable to cover monthly payments, leading some to default.
A borrower goes into default when they miss credit card payments for over 180 days, roughly six months. When there is a failure to pay over such a long period, banks generally take this as a sign that a borrower won’t pay the debt anymore, said Matt Sotir, financial advisor with New Hampshire-based Equitable Advisors.
Defaulting on credit card debt can have serious consequences, including a negative impact on credit reports that lead to a long-lasting effect on the ability to borrow money, Sotir said. “These are debts that have a lot of impact and I think sometimes people don’t realize that if they missed [a payment], how bad it could be for them in other areas.”
Here’s what you should know about credit card defaults.
What it means to default on a credit card
There are several levels of consequences when credit card payments are not made. It begins with late fees, higher interest rates and a potentially lower credit score. If a borrower doesn’t pay for 30 days the bank considers the credit card “delinquent” and the borrower’s credit scores can be damaged further.
When a borrower fails to make a payment for roughly six months, the bank considers the credit card in default, which means they’ll close your account and refer you to a collection agency, said Chip Lupo, writer at WalletHub.
“That’s where you’re going to really have trouble obtaining future credit for a while,” Lupo said.
When a collection agency assumes your debt, they’ll reach out via phone, email and mail to encourage you to pay. If it’s not paid, the collection agency may take legal action.
How it impacts your credit score
Defaulting on a credit card will mean serious consequences for your credit score. It’ll limit how much you’ll be able to borrow in the future and how much it’ll cost you. If you don’t pay your credit card bill for a month, your credit score will likely fall between 60 and 100 points, said Rikard Bandebo, chief economist at VantageScore.
While there isn’t a specific amount of points that your credit score will fall should you default, it will appear on your credit report for seven years, added Bandebo.
“There’s not miracle solutions that once you’ve missed a payment, or you’ve gone to default, to simple go back to where you were. You can’t just flip a switch,” he said.
Ways to avoid a default
It’s best if you pay your credit card in full every month, but if that is not possible, getting to at least the minimum monthly payment each month can help you avoid falling further into debt, Bandebo said. “Do whatever you can not to get to the next stage. If you’re 30 days late, try to avoid getting to 60 days and absolutely try to do everything you can to avoid getting default.”
Other alternatives include reaching out to a credit counseling organization or transferring your debt to a 0% interest card, though that typically comes with a fee.
If you find that you can’t regularly make payments to your credit cards, Sotir recommends looking at your budget to find which expenses can be cut.
If your expenses outweigh your income, Sotir said look for a temporary second job, check if you have assets that you can sell or ask family if they can help while you get back on your feet. Also, some banks offer hardship programs that provide assistance for people who can’t afford large and high-interest credit card balances.
What should I do if I default on a credit card?
The first step is to be proactive, said Sotir. Whether it’s reaching out to your bank or working with a financial advisor, the quicker you start looking for viable solutions the more consequences you will be able to avoid.
Sotir recommends you reach out to your credit card company to negotiate the debt since it’s in the bank’s best interest to help you catch up. If your account goes to a collections agency, find out if they can offer a payment plan or seek help from a nonprofit credit counseling organization.
Lupo said bankruptcy should be considered the last option if you have exhausted all other alternatives.