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Debt is a big problem in North America, particularly when it comes to unsecured credit card debt. Credit cards, however, may be a financial burden as well as a beneficial financial instrument.
When you use a credit card responsibly (paying your payments on time and in full), you can raise your credit score, which strengthens your credit report and makes it simpler to obtain additional credit in the future.
However, being reckless with your credit cards (missing or late payments) has a plethora of negative effects, including a pile of debt. It’s also difficult to get back up once you’ve gone under the mountain.
So, what are the ramifications of completely discontinuing your credit card payments? If you already use a credit card, you already know that making at least the minimum monthly payments will protect you from the worst of the consequences.
However, if you’re reading this, it’s possible that you’ve already stopped making payments or are going to do so. We realize how quickly and easily debt problems may spiral out of control. That said, if you’re starting to fail on your credit card payments or will soon, it’s critical to understand the repercussions.
What Does It Mean to “Default”?
The phrase “default” refers to a person who has failed to meet a commitment.
In this scenario, we’re talking about the terms set forth in your credit card’s contractual agreement. While practically every credit card contract has some additional fine language that must be read, the basic guidelines always apply.
To avoid a penalty, you, as the cardholder, must make at least the minimum monthly payment (though you should always endeavour to pay in full if feasible) by the due date, every time. You can keep using that credit card till your next bill arrives once you’ve completed that responsibility.
On the other hand, if you miss a payment, even if it’s only a few days late, you’re technically breaking the terms of your contract and defaulting. While some lenders, such as credit card firms, would give you a few missing payments before labelling your account “defaulted,” others will do it right away. In any case, allowing oneself to fall into default mode is not a smart idea because once you do, you may find yourself in a difficult scenario very soon.
Late or Missing Payments
So, what happens if you start forgetting to pay your credit card bills? At first, not too much, at least that was my original thought. When you default on a payment for a larger debt like a mortgage, which can be worth hundreds of thousands of dollars, your lender is likely to give you more than a stern lecture, even if the payment is only late or short.
Because mortgages are so costly, your mortgage lender, especially if it’s a bank, will become concerned straight away. If you stop paying payments, it will take them a long time and a lot of money to recover their losses, so they must act swiftly to protect their investment.
What Happens to Your Rate of Interest?
Your penalty fee(s) will then begin to accrue interest, just like any other overdue charges on your credit card. Then your interest rate will rise, which is one of the main reasons why your debt can quickly spiral out of control.
When you apply for a new credit card, you’ll be given an introductory interest rate based on your credit score, however, many banks will give you a special promotional rate if you’re a new customer.
When you default, though, your interest rate might increase by as much as 5%. These interest rate hikes can be a big drain on your money in the long term, costing you hundreds, if not thousands, of dollars over the years.
As your debt grows, it’s possible that you’ll be paying off a $5,000 credit card payment 65 years from now. That may add up to a stunning $22,000 in interest charges!
Credit card issuers are now forced to offer information on their statements that shows how much you would owe if you only make minimum payments.
What Happens to Your Credit Report and Score?
Defaulted payments can cause some of the most serious damage to your credit report and credit score.
Once again, not all credit card issuers will automatically record a single missed payment to Equifax and TransUnion, Canada’s two major credit bureaus, even if it is paid within 30 days.
If you haven’t missed any previous payments and paid your account late, your interest rate may rise somewhat, but your credit score will not be harmed right away.
However, if you have a history of missing payments or if you go over the 30-day limit (which may imply you’ve missed two payments in a row), things can quickly spiral out of control.
Following the second missed payment, any credit card business will be more likely to record your activity, or lack thereof, to the credit bureaus. Even with 30-60 days of failed payments, depending on how your card company operates, they may still give you some wiggle room, however other businesses won’t.
All bets are off after 90 days, or three missed payments and your failure to follow through with your agreement will be recorded. As previously stated, penalty fees are not the only punishments you will face. Your credit score will be severely harmed if your default is reported after the 30-day period has passed.
What Should You Do If Your Credit Card Debt Is Out of Control?
To begin with, the greatest thing you can do to keep your credit card debt from wrecking your financial future is to be proactive and confront it to the best of your abilities. Even if your bank account is depleted for a while, it’s nothing compared to the amount of money you’ll wind up spending if you default on your payments over an extended period of time. If you can’t afford to pay your credit card bills in full, making minimum payments is a viable option, but it’s not one you should stick to for the rest of your life.
If your debt is escalating to the point where you can no longer manage it, you may want to consider the following options:
- For further information, contact a certified credit counsellor.
- Consider enrolling in a debt management program.
- Make an application for a consumer proposition.
- Make a personal bankruptcy filing (only if you have no other choice).
The Bottom Line
At Lionsgate, we specialize in helping people get the extra cash they need, obtain funding for private mortgages, as well as for other real estate transactions. If you are looking to buy land in Canada, get a mortgage or apply for a loan, fill out the form below. Or, You can leave us a message and we will try to connect you with local lenders and sources that best meet your needs.
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