Consequences of Credit Card Default
Credit cards undoubtedly are a boon to many of us. They are the easiest to carry everywhere, and with one single swipe, the world can be at your feet. But, seldom does one realize that this card of happiness can turn into a deep pit of worry. Credit card default is at an all-time high in the country. While it is possible that such defaults are deliberate, more often than not, they are completely unintentional.
You need to be regular with your credit card payments, and any carelessness could prove detrimental to your finances.
Every new defaulter, however, receives a benefit of the doubt. All such borrowers are given an opportunity to approach the bank and explain as to why the payments were not made in time or why the payment plan needs to be restructured. The notices of default will be issued as soon as the first installment is missed. Further action will depend on how the defaulter and the bank agree on resolve the issue. The bank will approach the guarantor only if the need arises.
What Happens When you Accumulate a Credit Card Debt?
1. Payment of Late Fee
If you miss the due date of payment of your credit card bill, the bank will charge a late fee on the bill. Not only that, paying less than the due amount will also result in an additional fee being added either to the current month’s credit card bill or the next month’s bill. Either way, there is no escaping the late fee.
2. Increased Interest Rate
If you have already committed a credit card default and still continue to use the card to make purchases, the banks will increase the interest rate applicable to you. Such an increase will affect the credit card EMI, bank withdrawals, etc. Additionally, the interest charged on general purchases may also get hiked.
4. Loss of Credit Card Limit
Continuing defaults on bill payment will lead to a decrease in your credit card limit which in turn will affect your spending powers and future transactions and purchases.
5. Reduction in Interest-Free Period
Banks generally provide an interest free period of 55 days on new cards to allow full payment of the credit card bill. However, defaulting in payment will lead to a withdrawal of this facility temporarily or even permanently.
6. Recovery Agents at Your Doorstep
If the payment of your credit card bill is not made within 90 days, the case gets transferred to the bank’s in house recovery division. Dealing with such recovery agents can turn your worst nightmare into reality.
However, it must be noted that there is no law in the country which permits banks to hire agents for recovery of debt through unlawful means like threats and extortion. Making threatening calls is a crime and if you find yourself on the receiving end of such calls; it must be reported to the police station. In such cases, the defaulter can file a complaint against recovery agents and banks involved in making extortion calls.
7. Downgrading of CIBIL Score
This is possibly the worst of all consequences, Payment defaults on credit card bills are regularly updated by banks with CIBIL which negatively affects your credit score. This can n affect your financial moves in the future as your application for loans is liable to be rejected due to negative credit score.
What to do When You Miss Out on Payment?
As stated earlier, credit card defaults are not always wilful and it is possible that some genuine reason exists behind the default. If for some reason or the other, you have been at the defaulting end; you can consider taking the following steps.
1. Deferring the Payments
Notifying the bank about your temporary inability to make the payments will probably be your best option. You can discuss a deferment plan with the bank and real life cases have been proof that the banks usually grant such requests if the reason for non-payment is genuine.But, remember that the bank may impose penalties in return for allowing deferment.
2. EMI Reduction
Taking appropriate steps to reduce the EMI can help. This way you can reduce your EMI payments. There is just one catch; lower EMI means a higher rate of interest. Nonetheless, this is the best option when you are in a financial crunch and hope to get out of it as soon as possible.
3. Loan Restructuring
If you find yourself unable to keep up with the pace of repayment, you may ask the lender to increase the time frame of repayment. Alternatively, the entire loan plan be restructured to lower the interest rates, amount to be repaid, and other charges. In many real life cases, banks agree to waive the interest and penalty for non-payment or delayed payment; and agree to formulate a plan for repayment of principal amount instead.
4. Full Settlement
If you are experiencing deep financial crisis and don’t see yourself coming out of the choppy waters anytime soon, you may opt for a one time full settlement plan with the bank. This option is generally exercised when the amount of accrued interest becomes larger than the principal amount.
Although this may seem like a lucrative option, you need to use caution as your credit reports will reflect this fact and affect your credit score.
Before making any decision on how to repay the debt, you needs to analyze your situation and make a realistic estimate. Work with the bank in a way that makes them understand that your problems are genuine and they might just give you a leeway.
Repaying the banks for the money you owe them is not only a legal responsibility but a moral obligation as well. Spend thoughtfully, monitor your expenses diligently and avoid missing your credit card payments. If you do end up defaulting, this guide will prove to be a useful tool.