The dreaded, yet avoidable four letter word — debt — haunts many of us, but it doesn’t have to haunt you if you are well educated on the consequences of not paying off debt. Whether it’s credit card debt or loan repayments, one thing is for sure: you don’t want to be late on paying your debt. Multiple defaults on debt is generally a guaranteed call to the collection agency. If you skip those one or two payments ‘for now’ you will very likely not escape accumulated debt, higher interest rates or a tarnished credit score. There are some tough consequences for not paying off debt.
Before discussing what can happen if you don’t pay your debt on time, let’s talk about a little thing called credit. Ok, it’s not so little, it’s actually quite important, especially if you are an entrepreneur or business owner, or if you’d ever like to purchase a car or a home, or just about anything. For more on the importance of having a good credit score, refer to this blog post. In most cases, if you have unsettled business in the name of unpaid debt, your credit score will drop.
How low can your credit score go?
300 to be exact. That’s the lowest your FICO (a person’s credit score calculated with software from Fair Isaac Corporation) score can decrease. This is quite important because your credit is a history you carry with you wherever you go. It’s like your financial lineage, sometimes favorable, other times it can completely work against you.
How is FICO calculated? In most cases, if you miss 4 or more payments, accruing too much debt, the creditor will contact a debt collector. Debt collectors send a message to the credit bureaus, which will directly impact your credit score. Your credit score will drop and may have already dropped if the collection is on a credit card or loan. The late payments and subsequent charge-off that typically precede a collection account will have damaged your credit score by the time the collection happens.
On a similar note, this also means there will likely be a delinquency alert on your credit report. A delinquency alert acts as a red flag for a potential lender, letting them know you haven’t kept up with payments. Generally, negative information, such as delinquencies or bankruptcies, are removed from your credit score after 7-10 years. The good news: you won’t appear deceitful to financial lenders for an eternity. The bad news: you will for at least 7 years.
Just one month late…
You will likely be charged a late fee — these usually range case-by-case, and although it wouldn’t be the worst-case scenario, it’s extra money you can avoid by simply paying on time. The late payment can also appear on your credit score, taking you a few points down. Not to mention, you’ll be receiving regular reminder calls and emails from your lender.
In the case of mortgage loans, after the first late payment the bank will attempt to contact you and, if it fails, they may issue a foreclosure order thereafter.
Two months late…
Apply the same measures previously mentioned, and add a “definitely” before the late payment appearing on your credit score — because it will definitely happen. If it’s a credit card, your annual interest rate will rise, meaning you’ll have to continue paying the bank additional money on top of what you already owe.
In the case of car debt, from this point, it is possible that the lender will issue a recovery order, which means that you will lose your car, and you, unfortunately, will still have a debt! You will still have to pay the difference between the current value of your car’s sale and the amount you owed at the time of recovery.
Three months late…
By this point, the total amount you are charged will continue to increase, because delays continue to apply and interest accrues. If the debt is not insured by a car or your home, they will probably offer you payment plan options and settlements to pay off the account by paying 50% right away. If you are not offered these options, you can ask for them. Generally, financial institutions will not negotiate with you until 90 days have passed. Also, the calls will become much more aggressive.
A place we’d rather not visit: Six months late…
The cards are canceled — a charge-off will take place — which is very damaging to your credit record: it means the bank feels that you will never pay the debt. If your debt was sold to a collection agency, they can re-sell the debt. Each sale creates an additional alert on your credit report, so your credit report and score suffer greater damage when the debt is sold off.
The good news: at the very least, you won’t go to prison. There is no prison for debts in the US, but if it’s considered that by not paying you have violated a legal contract, the collection agency or the bank may choose to bring you to trial. The typical consequences of losing one of these judgments are: withholding a percentage of your salary; freezing your bank accounts; in some cases, your home might be taken over; and in all cases, this will cause significant damage to your credit history.
Have a headache yet? As you can probably decipher after reading all of the nuances of not paying a debt in the U.S., skipping a month or two is a big deal. It will also negatively affect your chances of getting a job, renting or buying a home or car, and even getting a mobile phone.
Conclusion: Don’t skip monthly payments unless you absolutely must
It pays to make every effort to pay your debts — or, at least, it saves you significant loads of cash. If you are not going to be able to pay for a month or two, it is a good idea to call the bank to negotiate a grace period. Generally, banks can be very flexible as long as they see that you are willing to pay and are notified in advance. Do your best to save yourself complications in the long run and act soon.