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4 dangers of not paying off your credit card debt

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Not paying your credit card bills could have some serious (and long-lasting) repercussions for your finances. Getty Images/iStockphoto

Right now, millions of Americans are feeling the lingering burn caused by a mix of inflation and elevated interest rates. Not only are today's housing, groceries, fuel and other consumer goods prices much higher than they were just a few years ago, but borrowing costs are also much higher, too. And, while the Federal Reserve's rate hikes over the last couple of years have helped bring down the inflation rate from its peak of over 9%, the current inflation rate is still too high at 3.4%

In turn, the Fed is keeping its benchmark rate paused at a 23-year high to try and bring inflation down to their 2% target rate. But this mix of high rates and elevated consumer goods costs means it's a lot harder for people to find room in the budget for their essentials. So, many are turning to credit cards to help cover the essentials (and non-essentials) that they can't otherwise afford.

That may not be a great idea in today's high-rate environment. After all, the average credit card interest rate is closing in on 22%, making minimum payments a serious stretch for millions of households. And, recent statistics show that credit card delinquencies are rising. But while defaulting on your credit card accounts can provide temporary relief from your monthly payments, the long-term consequences can be severe. 

Explore your options for dealing with high-interest credit card debt now.

4 dangers of not paying off your credit card debt

While the short-term relief of skipping a credit card payment is undeniable when money is tight, there are some of dangers of allowing delinquencies to spiral out of control, including:

A damaged credit score

Late or missed payments can severely impact your credit score. That's because your payment history is one of the biggest factors, if not the biggest, considered as part of most credit scoring models. 

For example, just one missed payment can send scores plummeting by 100 points or more, and continued delinquencies will only compound the damage. And, if you miss multiple payments or fully default on what you owe, the damage to your credit score can make borrowing for things like mortgages or auto loans, or getting approved for apartment rentals, extremely difficult and expensive. A damaged credit score can also make it difficult to be hired for certain types of jobs, so it's important to avoid this pitfall if you can.

Explore the debt relief programs that could benefit you in today's high-rate environment.

Late fees and penalties

After 60 days late, federal law allows credit card companies to spike interest rates on credit cards. In turn, credit card companies are often quick to penalize late payers with punitive interest rates that can easily close in on 30%. Credit card companies are also allowed to charge late fees on payments made after the grace period. 

This, coupled with the penalty credit card APRs, makes catching up on past-due balances extremely difficult, even if you find more room in your budget to try and get back on track with your payments in the future.

Debt collection efforts 

If you fail to make payments for an extended period, your credit card company may eventually send your account to a third-party debt collection agency. Debt collectors are known for being relentless in their pursuit of payment. If this happens, you can expect repeated calls to your home, work, friends and family members demanding payment. And while federal laws prohibit abusive conduct, the torrent of calls and letters to try and get you to pay what you owe can take an immense toll.

Potential lawsuits

If you ignore debt collection efforts, the creditor may decide to pursue legal action. This begins with a formal summons and complaint being filed against you in civil court. Fail to respond, and the creditor can seek a default judgment. With a judgment, creditors can utilize aggressive collection tactics like garnishing a portion of your wages directly from your paycheck. They may also seek court orders to seize funds from your bank accounts or place liens on any property you own. 

And, creditors can pursue these remedies for many years. Declaring bankruptcy is often the only way to permanently discharge these types of creditor judgments against you. But even if you avoid a judgment by appearing in court, the legal process itself is unpleasant, and court fees can quickly add up on top of the original debt balance you owe.

How to pay off your credit card debt when facing financial hardship

If you're facing financial hardship, there are several options available for paying off your credit card debt, including:

  • Credit card hardship programs: Many credit card companies offer hardship programs that provide temporary relief via reduced interest rates or waived fees. However, these programs require you to show proof of financial hardship in many cases and the relief is often temporary.
  • Debt management programs: Debt management programs offered by debt relief companies and some non-profit credit counseling agencies help you manage your debts by negotiating new terms and interest rates with your creditors. That can offer some relief when money is tight, but they may require you to close your credit accounts as part of the program requirements.
  • Debt forgiveness programs: Debt relief companies typically also offer debt forgiveness programs, where they negotiate with your creditors to try and settle your debt for a lump sum that is less than what you owe. However, the forgiven amount may be considered taxable income and there are typically fees charged by the debt relief companies when negotiations are successful.
  • Debt consolidation programs or loans: Some debt relief services also offer debt consolidation programs that can be used to roll all of your debt into one lump-sum loan that can be used to pay off your existing debts. This can simplify your payments and potentially lower your interest rates, but you'll typically need a good credit score (or better) to qualify.
  • Bankruptcy: As a last resort, filing for bankruptcy can provide relief from overwhelming debt by restructuring or wiping your credit card debt. That said, bankruptcy can also have severe consequences for your credit score and ability to obtain credit for several years, so make sure you fully understand the repercussions before filing.

The bottom line

Facing financial difficulties is never easy, but ignoring your credit card debt can only make the situation worse in the long run. Rather than risking the dangers that come with defaulting on your credit cards, you may want to be proactive and face the difficulties head on instead. There are lots of potential solutions to consider, and by exploring your available options, you may be able to develop a plan and tackle your debt before it spirals out of control.

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