Personal Finance

How credit card delinquency works

Credit card delinquencies occur when a cardholder fails to make monthly payments. While being 30 days late is generally considered delinquent, it usually takes two months of delinquent payments to report the information to a credit reporting agency. If an account is reported as delinquent, the event could negatively impact your credit score and impair your ability to borrow in the future. However, once you have a solid understanding of crime, dealing with it is actually quite simple.

key takeaways

  • Credit card delinquency refers to delinquency in the monthly payment required by the credit card company.
  • Being late by more than a month is considered delinquent, but that information is usually not reported to credit reporting agencies until two or more payments are missed.
  • Delinquent accounts on credit reports can lower credit scores and reduce an individual’s ability to borrow in the future.
  • Missing four or five payments may turn the account into collections, but only one minimum payment will stop late payments from progressing.
  • Positive information on a credit report, such as an account in good standing, can help offset some of the flaws caused by past delinquencies.

What is a credit card delinquency?

With a credit card, you must pay a percentage of your balance each month to keep your account up to date. By giving you a line of credit, the credit card issuer is basically giving you a loan that you have to pay back little by little each month. As a cardholder, if you fail to make the required minimum monthly payments, you are in breach of the terms of your agreement with the lender and the account will be delinquent.

The delinquency rate is broken down into levels that indicate how much a cardholder missed on a payment. These levels are usually expressed in days. For example, the day after you miss your first payment, you are one day behind. After you miss the second payment, you will be 30 days behind and so on.

Technically, consumers default after missing a monthly payment. However, delinquencies are generally not reported to major credit bureaus until two consecutive non-payments. Thus, providing a buffer for consumers and allowing them to take a wrong step without significant impact.

How credit card delinquency works

impact of crime

Don’t get me wrong, though, because being reported as delinquent by a credit bureau can negatively impact your credit score, so this principle works. While the damage from just two defaults can be relatively small, after three, your credit score can drop by as much as 180 points.

Once four payments are missed, the impact on your credit score will become more severe and your account may be redirected to a collection. After five non-payments, the collector’s efforts are sure to increase and legal action may be taken.

In addition to suffering credit score losses and being targeted for collection efforts, delinquent consumers’ billing privileges will be suspended pending payment or permanently revoked, meaning full payment will mark account closure. While these penalties may seem harsh, consider the situation further: a person who reaches this level of delinquency has not paid a credit card bill for five months. Credit cards are not some magical piece of plastic that you can buy for free, and any credit card company generally doesn’t condone this.

get rid of crime

Still, just as there is a way to get into crime, there is a way to stop it and eventually get out of it. Making a minimum payment stops delinquency from progressing and keeps you at your current delinquency level. Knowing this is crucial because reporting 120 days delinquent to the credit bureau is much worse than reporting 90 days delinquent. So if you can make at least one minimum payment (usually about 3% of your balance), then you should.

However, this is where consumers get into trouble, making the same mistakes over and over again. Fortunately, these mistakes are not hard to avoid when you know to watch out for them.

Mistake 1. Paying less than the minimum payment

Interestingly, payments below the minimum had no effect on delinquency — almost as if no payments were made at all. So when people pay a little bit (thinking it will definitely improve their situation), it doesn’t do any good at all. This mistake is easy to avoid, as long as your credit card payment is greater than or equal to the required minimum amount.

Mistake 2. Paying only the minimum payment

Many people confuse the minimum payment required with the total amount shown on the bill. The amount due is the total amount you must pay, and may consist of multiple minimum payments if you are in arrears. Don’t stop paying until you’ve paid the full amount needed to keep your account up to date.

In fact, while making one minimum payment can prevent delinquency from getting worse, making two minimum payments can reduce delinquency. For example, if you are 90 days delinquent, making two minimum payments will make you 60 days delinquent. One minimum amount will count towards what you owe for the month, and the other will cover a payment you missed. To get rid of arrears completely and stay current in your account, you must make the total minimum payment you missed plus the minimum payment for the current month.

Dealing with the consequences of crime

Once your bills are up to date, you will need to work on reversing the impact of delinquency. Delinquency is like a dark circle on your credit report because it shows consumer irresponsibility. However, the more you cover up with positive usage information, the less noticeable it becomes.

The best way to inject positive information into your credit report is to open a credit card, as information about credit card usage is reported to credit bureaus every month. Whether you’re buying and paying in full, or just maintaining an open card with zero balance, a credit card will give you ample opportunity to demonstrate financial responsibility.

If your credit report contains a history of delinquency that has not occurred, then you can send a credit report dispute for investigation and possibly deletion.

Secured credit cards are especially good for improving your credit because to open a credit card, you must pay a refundable security deposit. This margin guarantees approval, provides your issuer with default protection, and eliminates the need for expensive fee structures. Plus, since it’s also your line of credit, the margin ensures you don’t go beyond your means.

How to Avoid Credit Card Delinquency

The best way to avoid credit card delinquencies is to manage your debt responsibly. Here are some suggestions:

  • Set up automatic transfers— If you have a large number of monthly bills and have trouble keeping track of them, setting up automatic transfers with your bank or credit union can help ensure you never miss a payment.
  • prepare your budget– If you can take advantage of debt forbearance or forbearance during the 2020 economic crisis, then you need to be prepared to pay more to pay off those debts. Try to set aside enough money to cover charges that exceed the monthly minimum amount on your credit card.
  • stop using credit cards-Feel like your bills are overwhelmed? Put away your credit cards so you don’t take on more debt and dig yourself a deeper hole. Once you stop using your card, you can also consider a personal loan to pay off the monthly payments you owe. Just make sure not to add more bills.
  • call the credit card company— If you default on your repayments, contact your creditor immediately. Bringing their attention to your situation will make them more likely to work with you to resolve the issue.

bottom line

Ultimately, you won’t recover from the effects of crime overnight; it will take time and consistent, responsible credit card use. Remember to use your funds in the most efficient way, never pay less than the minimum amount, and understand the difference between this amount and the total amount due.

Once you get rid of delinquencies, you must play down the negative information on your primary credit report and earn your lenders’ trust by showing them that you can handle your credit without getting into trouble. So be patient, open a secured credit card, use it wisely, and you’ll eventually get back to where you were before.

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