How Credit Card Delinquency Works [Complete Guide]

By: Yara Pollard

Having and using credit cards require you to be diligent and responsible with your credit card payments. While credit cards offer a fantastic and quick financial solution, it is temporary and you still have to pay what you loaned.

With credit cards, there is a term of agreement wherein you have to pay a certain amount per month on the due date. Having missed or late payments can hurt your credit score. Moreover, missing your credit card payments can put you at risk of credit card delinquency.

If you become a delinquent credit card holder, you suffer a lot of consequences that can hurt your financial situation even more. This is why it’s best to avoid using credit cards if you are not confident of being able to make full or at least minimum credit card payments per month.

Knowing the do’s and don’ts of using credit cards is crucial. Otherwise, you can be more at risk of doing wrong credit card practices and credit card fraud. Moreover, it’s always best to know more so you can be better at making the right decisions. 

Credit card delinquency rates have been rising. During the second quarter of 2019, there was a delinquency rate of 2.56% at top commercial banks. Compared to the second quarter of 2018, the rate was just 2.15%. This is according to the Federal Reserve

Credit card delinquency can lead you to a far worse negative credit status if it continues to progress. Here’s everything you need to know about credit card delinquency.

What is Credit Card Delinquency?

You become delinquent when you have a credit payment past due by 30 days or more. Know that with the credit scoring system, payment history makes up the largest chunk accounting to 35% of your credit score.

Late or missed payment will affect your credit score. Moreover, if you’ve missed two consecutive payments, your delinquency will be reported to the credit bureaus. This is when you begin to feel the consequences of being delinquent. 

By this time, credit card issuers are also permitted to shift your interest rates to penalty rates. This penalty rate will stay in effect for six months. The penalty rate can be remedied by making six consecutive payments that are on time. 

As you may have noticed, we’ve just started yet the effects of being delinquent can cause major disadvantages. This gets worse as you miss more payments. After three missed payments, your credit score can drop by as much as 125 points. This is according to Investopedia.

After five missed payments, possible legal action can be taken against you. Your score will also plummet even faster with more missed payments. 

There are a lot of free tools you can use to know your credit score. If you are unsure or if you don’t know what your credit score is, you can use free tools such as Credit Sesame

According to The Balance, “your credit card issuer is allowed to keep the penalty rate effective for new purchases on your credit card even after you catch up on your past due balance”.

This is how critical it can be if you reach delinquent status. After 270 days of missed payments, all your loans will be in default. This will make it even harder for you to catch up as a default status can trigger all your remaining balance to be due in full. 

Moreover, a default status has a gruesome effect on your consumer credit report. In other words, being delinquent, then being default, will make it harder for you to borrow money in the future. 

Getting Out of Delinquency

You can stop the progression of credit card delinquency by making one minimum payment. While this can keep you at your current delinquent level, you can’t get out of delinquency just by making minimum payments. 

Here’s what you shouldn’t do with your credit card payments:

  1. Paying less than the minimum payment.
  2. Paying just the minimum payment.

Paying less than the minimum amount has no benefit. While a lot of people might think that paying small amounts can help their situation, paying less than the minimum doesn’t help. It doesn’t help you catch up nor stop the progression of your delinquency.

Moreover, paying just the minimum payment will take it longer for you to pay your debt in full. While paying the minimum stops the progression of your delinquency, paying multiple minimum payments decreases delinquency.

For example, if you are 120 days delinquent, paying two minimum amounts can bring down your delinquency to 90 days. One payment will cover your current month and the other minimum payment will count for one of your missed payments. 

For you to get out of the credit card delinquency status and become current on your account, you need to pay:

  • Total missed minimum payments
  • Current month’s minimum

Credit card delinquency shows your lenders that you are irresponsible with handling your credit. The worst thing you might think you could do is to open a new one. However, opening a credit card is ideal as credit card usage is reported to the credit bureaus.

It is one of the five factors that determine your credit score. With the new credit card, here are steps you can take to show responsible credit card usage:

  1. Make purchases and pay in full.
  2. Keep it at zero balance

Making purchases and paying them in full or keeping the credit card at zero balance is good for your credit report. There are different types of credit cards, the ideal one to use is a secured credit card.

This is because you place a refundable deposit with a secured credit card. This gives you the benefits of:

  1. Guaranteed approval
  2. Protection against default
  3. Removes need for expensive fee structure
  4. Your security deposit is your credit line. This means that you won’t be spending beyond your means.

Credit cards offer a lot of benefits. However, if you are not diligent with paying up on time, it can cause you a lot of financial suffering. Knowing how to improve your credit score is crucial. 

Having a high credit score allows you to have more credit options and lower interest charges. Meanwhile, having a bad credit score has the opposite effect. Strive to avoid credit card delinquency at all cost.

It doesn’t help and just causes you bigger financial problems. Begin with using a secured credit card or become more mindful and aware of your credit spending. 

Remember, good habits are hard to form but easy to live and bad habits are easy to form but hard to live with. Choose to form good habits with your credit card usage.

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