How Credit Card Delinquency Works

Credit card delinquency occurs when the cardholder falls behind in required monthly payments. While the 30-day delay is generally considered delinquent, it generally takes two months of delinquent payments before the information is reported to the credit reporting agencies. If an account is reported to be in default, then the event may have a negative effect on your credit score and reduce your ability to borrow in the future. However, once you have a deep understanding of crime, dealing with it is fairly straightforward.

Key takeaways

  • Credit card delinquency refers to late monthly payments required from credit card companies.
  • Being more than a month late is considered delinquent, but the information is generally not reported to the credit reporting agencies until two or more payments are missed.
  • Delinquent accounts on a credit report can lower credit scores and reduce a person’s ability to borrow in the future.
  • Missing four or five payments is likely to move the account into receivables, but making a single minimum payment can halt the progression of late payments.
  • Positive information on your credit report, such as current accounts, can help offset some of the blemishes caused by past delinquencies.

What is credit card delinquency?

When using a credit card, you must pay a certain fraction of your balance each month to stay current on your account. By granting you a line of credit, the credit card issuer basically gives you a loan that you have to pay off little by little each month. By not making the required minimum monthly payments, you, as the cardholder, are in breach of the terms of your agreement with the lender and the account becomes delinquent.

Delinquency is divided into levels, which are indicative of how many payments the cardholder has missed. These levels are often referred to in terms of days. For example, the day after you miss your first payment, you are one day past due. After missing your second payment, you are 30 days past due, and so on.

Technically, a consumer becomes delinquent after missing a single monthly payment. However, delinquencies are generally not reported to the major credit reporting agencies until two consecutive payments have been made. In this way, consumers are provided with a buffer zone and allowed to take a wrong step without suffering significant repercussions.

How Credit Card Delinquency Works

Effects of crime

Make no mistake about it though, there is a kind of principle of fool me twice, embarrass you, because being reported to the credit reporting agencies as delinquent will have a negative impact on your credit score. While the damage may be relatively minimal after just two late payments, after three your credit score can drop as much as 180 points.

Once four payments have been missed, the impact on your credit score will be even more severe and your account will likely go into collection. Collectors’ efforts are sure to increase after five late payments, and the possibility of legal action will likely be at stake.

In addition to suffering credit score damage and being subject to collection efforts, a delinquent consumer will have their collection privileges suspended pending payment or permanently revoked, meaning that payment in full will mark account closure. While these penalties may seem harsh, consider the situation further: Someone who reaches this level of delinquency did not pay their credit card bills for five months. A credit card is not some magic piece of plastic that allows free shopping, and generally no credit card company tolerates this behavior.

Get out of crime

Still, just as there is a way to get into crime, there is a way to stop it and ultimately escape it. Making a minimum payment stops the progression of delinquency and keeps you at your current delinquency level. Understanding this is essential, because being reported to the credit bureaus as 120 days delinquent is far worse than being reported as 90 days delinquent. So if you can pay at least the amount of a minimum payment (usually around 3% of your balance), you should.

However, this is where consumers run into trouble and make the same mistakes over and over again. Fortunately, these mistakes are not difficult to avoid when you know to be careful with them.

Mistake 1. Paying less than the minimum payment

Interestingly, payments for less than the minimum have no effect on delinquency, almost as if no payment had been made. Thus, when people pay a little (thinking that it will surely improve their situation), it does not bring any benefit. This mistake can be easily avoided as long as you only make credit card payments greater than or equal to the minimum amount required.

Mistake 2. Pay only the minimum payment

Many people confuse the minimum payment required with the total amount due that appears on their bills. The amount owed is the total amount you must pay to stay in good standing, and if you are in arrears, it will likely be made up of multiple minimum payments. Do not refrain from making payments until you have paid the full amount required to bring your account current.

In fact, while making one minimum payment prevents delinquency from getting worse, making two decreases delinquency. If you’re 90 days past due, for example, paying the amount equal to two minimum payments will take you 60 days. One minimum will count toward what you owe for the current month and the other will cover one of the payments you missed. To fully come out of delinquency and stay current on your account, you must pay the total of your missed minimum payments plus the current month’s minimum.

Dealing with the aftermath of crime

Once you are up to date on your bill, you will need to get to work reversing the effects of late payment. Delinquency is like a black eye on your credit report because it indicates consumer irresponsibility. However, the more you cover it with positive usage information, the less obvious it becomes.

The best way to infuse positive information on your credit reports is to open a credit card, because information about credit card usage is reported to the credit bureaus on a monthly basis. Whether you make purchases and pay for them in full or just keep an open card with a zero balance, a credit card will give you ample opportunity to demonstrate fiscal responsibility.

If your credit report contains a record of delinquency that did not occur, you can submit a dispute on the credit report for investigation and possibly expungement.

Secured credit cards are particularly good for improving credit because to open one, you must place a refundable security deposit. This security deposit guarantees approval, protects your issuer against default, and eliminates the need for a costly fee structure. In addition, since it is also your line of credit, the security deposit ensures that you cannot spend beyond your means.

How to avoid bad credit cards

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

  • Set up automatic payment—If you have numerous monthly bills and are having difficulty keeping track of them, setting up automatic payment with your bank or credit union can help ensure you never miss a payment.
  • Prepare your budget—If you were able to take advantage of debt deferral or forbearance during the 2020 economic crisis, you will need to prepare to pay more to cover those debts. Try to reserve enough to pay more than the monthly minimum on your credit cards.
  • Stop using credit cards“Do you feel like you’re underwater on your bills?” Save your credit cards so you don’t rack up more debt and get into a deeper hole. Once you’ve stopped using your cards, you might also consider taking out a personal loan to pay off what you owe with one simple monthly payment. Just make sure you don’t rack up any more bills.
  • Call the credit card company—If you fall behind in payments, contact the creditor immediately. Alerting them to your situation will make it more likely that they will work with you on a solution.

The bottom line

Ultimately, you will not recover from the effects of crime overnight; it will take time and responsible use of the credit card. Remember to use your money as efficiently as possible, not making payments below the minimum and understanding the difference between this amount and the total amount owed.

Once you get out of delinquency, you need to dilute negative information on your major credit reports and earn the trust of lenders by illustrating that you can handle credit without getting into trouble. So be patient, open a secured credit card, use it wisely, and you will eventually regain your former height.

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Mark Holland

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