Credit cards allow users to make purchases/transactions on credit, meaning that users can spend now and pay later. Banks/credit card issuing companies pay for your transactions for the time being and you have to repay the spent amount later. Now, when you fail to repay the spent amount in time (referred to as the credit card billing cycle), which comes to you as your credit card bill, you become a credit card defaulter.
Users become credit card defaulters when they fail to pay their credit card bills within the due time period for a long time. It is important to note that credit cardholders must also pay the minimum amount due. If the payment is not made for 6 months continuously, the credit card holder will be termed as a defaulter and his/her account will be immediately deactivated.
Well, even if you become a credit card defaulter, there is still some hope for you. To get back on track, you must bear the consequences of credit card defaulter and follow practices that will help you improve your credit score. This blog is a detailed guide for all this and much more. So, continue reading!
Reasons that can make you a Credit Card Defaulter
When you opt for a credit card, you sign up for various terms and conditions as laid out in the official joining documents by your bank/credit card issuer. One such condition states that you will pay all your credit card bills by the due date as listed on your credit card statement. If you fail to do so, your bank will send you warning/notices for 6 months on a regular basis.
However, if you still don’t act upon clearing your pending dues, your credit card account will be deactivated and will be reported to the credit bureaus. This will harm your credit score majorly. Hence, to avoid landing into such a situation, you must first be aware of the reasons that may make you a credit card defaulter and stay away from those practices.
- Over expenditure– There may be situations when you would spend an excessive amount considering your credit limit. However, you might not be able to repay the amount even when you receive your salary (this would certainly happen because you spent more than you earn). Hence, it is advised you should only spend not more than 60% of your credit limit in order to be able to repay the amount later.
- Postal delays– If you haven’t opted for online receipt of your bills, then your bank would send your bills to your residential address by post. In such cases, there is a high chance that your bills may get misplaced or get delayed in reaching you. This would eventually lead to late credit card payment. Hence, it is recommended to turn on your online notifications and to keep a regular check on your email for your credit card overdue.
- Procrastination– A lot of people tend to wait till the last minute to pay their bills. While it makes no difference if you pay it before your due date; it is always a better idea to make the bill payments well in advance. This helps you stay away from the risk of missing on the bill payment and leaves no chance of being liable to pay heavy interest charges for late credit card payment.
- Missed Due date– Even though it is less likely to happen, there may be a few instances where you would get confused with your due date, and eventually miss the payment of your credit card bills. Hence, it is advised that as and when you receive your monthly statement, you take a deeper look into the billing date and payment due date and set reminders accordingly.
What will Happen if You Become a Credit Card Defaulter?
Any of the above reasons might make you go through the consequences of credit card defaulter, even if you did not intend to follow such practices. Hence, you must be aware of the consequences that you would have to bear if you become a credit card defaulter so as to stay aware of your bills well in advance-
- Negative impact on credit score– Making late credit card payments or having missed payments lead to a lower credit score, which cancels out the major benefit that a credit card has to offer. Your credit score can be improved by effective usage of your credit card and timely repayment of your bills. It is necessary to have a good credit score in order to ensure that you are eligible for higher loans in the future. Not paying your bills in time will eventually hamper your financial health.
- Blocked Credit Card Account– Not paying your credit card bills for a maximum of 6 months will make you a credit card defaulter. You will be blacklisted from the bank, which, in turn, will block your credit card account.
- Legal implications– Not paying your credit card bills for a very long time will indicate that you are a fraud. As a result of this, banks might take legal action against you and it will become difficult for you to take credit from anybody in the future.
- High interest rates– Upon non-payment of the credit card bills by more than 60 days, the credit card companies charge interest rates as high as 30% of the credit card overdue. This high interest rate is also applied on the new purchases that you’d make using your credit card. If you continue doing this, in almost no time, the interest on your credit card bill would be more than your actual credit card bill!
- Interest on outstanding balances– Contrary to what most credit card holders think, you are not liable to pay only the minimum amount due out of your total credit card bill before the due date. Even though it is widely believed that paying only the minimum credit card balance would not make you liable for interest charges, it is not true. In reality, you will be paying interest on the outstanding amount starting from your due date. Hence, it is strictly advised that you pay your credit card overdue in full.
- Asset Acquisition– As a result of non-payment of pending dues, banks will have the right to use funds available in your savings or other accounts to clear your outstanding balances. In worst cases, banks may also seize your properties/other assets to settle the dues.
How can You NOT be a Credit Card Defaulter?
Credit card payments can have a major impact on your financial health; hence, it must be taken very seriously. Listed below are a few basic habits that you should inculcate in your financial routine in order to avoid late credit card payment and stay away from the consequences of credit card defaulter-
- Sign up for the auto-pay feature on your credit card’s mobile application/online portal
- Set up timely reminders for your due dates
- Do not wait until the last minute to pay your credit card overdue
- If you are really short of finances, then pay at least the minimum amount due before the last date. The remaining balance can be paid in the interest-free period
- You may take a personal loan if you have reached a stage where paying your credit card dues does not seem possible to you as these loans have lower interest rates
- You can request your bank to convert your outstanding balance into easy, affordable EMIs, which you can pay over a specified period of time
- As an alternate, you may also transfer your credit card balance to another bank’s account and pay the sum through regular EMIs
- If, unfortunately, the situations have become worse for you, you may file for bankruptcy which will allow you to restructure your debt and make it more affordable for you