Updated July 16, 2012

What Happens If I Don't Pay My Credit Cards?

With unemployment rates holding steady and consumers having difficulty finding jobs, many people are asking themselves what they would do if they lost their current income. They are unsure how they would cover their bills and uncertain what would happen if they were unable to make payments on some of their debts, like their credit cards.

Here is some information about what happens when you are unable to pay your credit card bills, plus some tips on what you can do now to avoid that situation:

What happens when credit card bills go unpaid?

Every situation is different and credit card companies may alter how they handle unpaid accounts, but in most cases, the scenario looks something like this:

  1. You get a call from a collections department. If you get into a situation where you are not paying your credit cards, the first step that will typically happen is that the credit card company’s delinquent accounts or collections department will call you. This can happen as early as 10 days past your due date. The representative’s goal is to collect a payment or put a plan in place to get a payment from you as quickly as possible.

  2. Damaged credit. Once your account reaches 30 days past due, your credit card company has the right to report a late payment to the credit bureaus. Your payment history is one of the most important factors in your credit score, so any late payments will cause your credit score to decrease. Your credit score is what most lenders use to determine whether to lend to you and if so, what your rate will be. This means that if you fail to pay your credit cards, you will have a more difficult time getting loans in the future.

  3. Court summons. Some credit card companies will summon you to court to get a judgment for payment. The outcome typically is that your wages will be garnished. If you get a court summons, it is important to show up so you can explain your situation.

  4. Your account is sold. If you go several months without making a payment, the credit card company is likely to sell your account to a third-party collections company. The collections company will contact you in an effort to collect payments until you pay off the debt as agreed or file for bankruptcy protection.

How to avoid the situation:

Here are some steps you can take to avoid letting your credit card bills go unpaid:

  1. Start an emergency savings fund. The general rule of thumb is to have enough money tucked away to cover at least three months’ worth of expenses. Of course, it never hurts to have more in savings.

  2. Watch what you charge. It can be awfully tempting to overspend when you have credit cards, especially when you have store cards on top of your regular credit cards. With purchases spread out over a variety of cards, sometimes you don’t even realize how much you are spending. For the next month, keep track of every purchase you make using your credit cards. This will help give you a snapshot of your credit card activity.

  3. Put yourself on a budget. After you have reviewed your shopping habits, create a budget for you and your family to follow to ensure you aren’t spending more than you can afford each month. The goal is to be able to comfortably pay off your credit balances in full each billing cycle.

  4. Leave your extra cards at home. If you find yourself too tempted by your credit cards, keep them at home in a safe place unless you are planning to use them for a specific purchase. This will keep the temptation at bay and will reduce your fraud risk.

  5. Ask for help. If you lose your job or find yourself in a situation where you will be unable to make your credit card payments, you may want to contact your credit card company. Many companies will work with their cardholders to come up with a payment plan that will work for both parties.

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Follow @CreditDonkey or write to Meghan Clark at meghan@creditdonkey.com

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