Missed card payments damage your score, credit future
By Erica Sandberg
February 13, 2015
I'm a few thousand dollars in debt on my card. I used it to buy a new computer and expensive software for school. I'm afraid if I keep missing payments, the bank can take all the equipment I bought with the card. Can they? –“Sidney”
Not to worry — the credit card issuer doesn't want your electronics now scattered with sticky crumbs. They just want the money.
Unlike loans for homes, vehicles or certain financed appliances, purchases that you make with plastic are not collateralized by the items you buy. When they are, the lender has the right to repossess after a specific number of missed payments. But even something like a car loses its value very quickly, making it far less attractive to claim. Like credit card issuers, they much prefer the borrower to repay in cash.
Of course, that still leaves you with the problem of having fallen behind on payments. That's not good and there are repercussions. Chief among them:
Credit score damage. Payment history is 35 percent of a FICO credit score, so even one skipped due date will result in damage. When the balance is large (especially if you're near your credit limit) and the late payments keep being logged, your scores will plummet. That's because another 30 percent of the FICO score requires you to keep your balance as close to zero as possible or your credit rating can suffer. FICO is the dominant scoring model that lenders use to assess your creditworthiness. That may not seem important now, but when you get out of school, you will want good credit so you can land a nice apartment, borrow for a car and even get the job of your dreams.
Expensive interest and fees. If you've been reading your statements, you're aware that interest and late fees are being added to the balance every month. But check out that APR, too. It has probably spiked to a punitive one, which can easily be in the upper 20s. The higher the rate, the more costly the fees become.
Lawsuits. In the event the issuer does not receive what's due in about six months, it may sue you for the balance. That's even worse than it sounds, because it typically ends with a judgment on your credit report for an amount swollen with even more accumulated fees. If the issuer has the right to garnish your wages or claim money from accounts, it very well might.
Collection action. Sometimes issuers just send delinquent accounts to third-party collectors. If it goes in this direction, expect plenty of calls and letters. Not nice ones, either. Oh, and they can also sue you.
While none of these consequences include the seizure of your computer and its accessories, they are horrible enough to avoid if at all possible.
There are a couple of ways to deal with this problem, and I urge you to give each a chance.
The first is coming up with the funds. Can you borrow money from a friend or family member who you can repay later? Maybe you can work more or get a part-time job (I know you're a student, but many are employed while taking classes). You could serve on market research panels or land gigs with marketing companies. If you have any items of value that you don't need, consider selling them and putting the proceeds toward the debt.
The second is budgeting. Can you reduce expenses to such a degree that there is more available for the card payments? There are creative ways to redirect your money, such as cutting electricity costs by turning out the lights and fans when you leave a room and cutting off cable.
Consider a combination of earning more money and cutting costs. The more cash you can bring in and save, the faster you can escape this mess.
I know this won't be easy or fun, and I do empathize. But frankly, if you don't get this situation under control, you will regret it.
Got a question for Erica? Send her an email.