In physics every action has an equal and opposite reaction.Â When weâ€™re talking about credit cards it very similar although the reaction is usually financial in nature. Pay off your cards on time all the time and your credit history will be excellent, but pay late (or very late) and the financial consequences will be quick and sometimes harsh.
Credit card companies will start charging you a late fee on the very first day that your bill is late, usually to the tune of about $35.00. They will also immediately start charging more interest on the past due amount and will typically begin charging you a higher interest rate that will stick with you for 6 to 12 months, even if you only pay late once and never again.
After 60 to 90 days the card will be listed as in default and after 180 days it will be sent to collections. No further charges will be allowed and the account will be permanently closed. Before it goes to collections the credit card company will continue to seek payment and eventually start sending letters threatening to send your account to a collections agency. Once this happens the interest will no longer accrue, however the collection agency will attempt to get their money any way that they can.
The effect that late payments have on your credit score is minimal but still you shouldnâ€™t do it too often for obvious reasons. An account in default however will make it very difficult for you to qualify for any other type of credit and the collection agency may even sue you.Â If they win they can garnish your wages and even make you pay the court costs.
Bankruptcy is definitely an option if youâ€™re overwhelmed with debt but it will stay on your credit report for 10 years and make getting a car loan, home loan or any other type of credit line practically impossible during that time period.Â This is really an option of last resort.
Better to talk to your credit card companies before things get too far out of hand and negotiate a settlement with them.Â Oftentimes they can forgive late fees, lower your interest rates and defer your payments until youâ€™re able to once again get current on your payments. This will still affect your credit but for a shorter time and with fewer consequences than letting your debts go to a collection agency or filing for bankruptcy.