What is it like to default on a credit card?Going into default on a credit card, or defaulting in general for that matter, is no fun. For most, it can be an extremely stressful and confusing financial situation that can quickly worsen if you don’t know how to navigate it successfully. That’s why we’re going to go over everything you need to know about credit card default as well as how to avoid it.

What does it mean to default?

Default, in the context of finance, is a state where you’re so far past due on any obligation – loans, credit accounts, etc. – that the lender might choose to close the account and write off the loss. As a result, your lender will report your failure to pay to the credit bureaus and eventually send your debt to a collections agency. Although we’re primarily discussing credit card default in this post, much of what we discuss is also relevant to other types of default.

Default for all types of debt is on the rise in the U.S., but with total credit card debt now exceeding $1 trillion, aside from student loan debt, it is one of the most significant financial burdens faced by families. Luckily, credit card delinquencies and defaults remain low relative to their recession highs, though there’s been a slight uptick recently which has some concerned.

What should I do if I default on a credit card?

Credit card default can be harmful because the interest rates for cards tend to be high, meaning that late payments wind up hitting you with fast-growing balances in addition to the usual struggles of default. The moment you default, you should do the following:

  • Find out if your debt has already been charged off. While default is not something to aspire to, it’s not as bad as the worst possible scenario. That distinction occurs when your debt gets charged off, or the moment when your debt is written off for good and given to another entity like a collections agency. Until this takes place, you might still have a chance to reverse the situation. You should consider talking to your credit card provider once you learn of your default and discuss with them a plan to address the debt before it’s officially charged off.
  • Pay it off in full. Paying off any remaining balances before the debt is transferred to collections or the account is closed can turn your situation around, but it’s likely that if you couldn’t make payments before, this isn’t a realistic solution.
  • Negotiate the conditions for settling the debt. Sometimes if you contact a creditor and are willing to make a case for a negotiated settlement, you can avoid the worst impacts of defaulting. Once you know the outstanding balance for your default, talk to your creditor about paying off a reasonable portion of the balance as a compromise. Be aware that your issuer may not be willing to make a payment plan or negotiate with you, considering you weren’t able to keep up with your normal credit card payments. Still, there’s no harm in trying, and you will find that many issuers have special programs to help those in need of financial assistance.
  • Consider filing for bankruptcy. In bankruptcy, certain types of debt like credit card debt can be restructured into non-burdensome payments or discharged entirely. This obviously is a drastic option, one that’s not without its consequences (like wrecking your credit), so before considering it, make sure you consult an attorney and understand all of the consequences.

How can I prevent credit card default?

Because default happens gradually over a long period, there are things you can do to slow down or stop its progression.

  • Manage your credit strategically. While life happens, ideally, credit cards should be used for budgeted expenses – like groceries and gas – or for desperate emergencies. Doing so will help you keep your balances down and make it more likely that you pay off what’s on the card monthly.
  • Be transparent with your lender. If you’re struggling to make payments, before you default, or even before you become delinquent, you should discuss any hardships or difficulties that would cause you problems with paying less than your minimum payments. If you’re a loyal cardholder who has a history of paying on time, the issuer may be willing to make a one-time exception for you.
  • Consult a credit counselor. A reputable credit counseling or debt management service might be able to help you both negotiate reasonable monthly payments on your debt and come up with a workable budget that will strengthen your finances. This in itself isn’t a solution to any debt problems you have in the present, but it could be a great start on working toward ridding yourself of them in the future.

While missing a credit card payment isn’t ideal, having a credit card default is even worse, as you learned from this post. For more information on maintaining credit and managing debt, keep reading our credit repair blog.