Missing a credit card payment is not something to take lightly. Whether you truly can’t afford to make the payment or you simply forgot about it, the financial consequences can be pretty hefty.
It can take years to reverse those consequences, especially since leaving unpaid balances on a credit card results in a lower credit score. Improving your credit score, which is vital for anyone looking for a mortgage or car loan, isn’t an overnight process. Let’s explore why you should avoid missing a credit card payment at all costs:
1. A Missed Payment Leads to Late Fees
If your credit card bill is due on the first of the month and you make the payment on the second or the 25th of the month, you’re going to be charged a late fee. Late is late–even if it’s just one day past the due date. The fees can be as high as $35.
If you call the credit card issuer, they may waive the fee if it’s your first time paying late. But don’t get used to a perk like this if you make a habit of making late payments.
Even if you never make the payment at all, the late fee will kick in. Though in this case, you’ll have bigger problems than a $35 late payment. There’s a big difference between paying late and not paying at all.
If you pay the minimum payment on the card by the due date, which is typically significantly less than the total balance you owe, a late fee won’t be applied. This is because you are making a payment, albeit a very small one. Remember, simply paying the minimum payment will keep you in debt for years, thanks to interest charges.
2. Expect to Pay Hundreds in Interest Charges
Aside from late fees, failure to make the credit card payment will result in interest charges. Each credit card has an interest rate, or an annual percentage yield. Don’t be surprised if this rate is as high as 25%. Missing a five-figure credit card payment can easily result in hundreds of dollars worth of interest charges.
Unless you pay the entire balance off in full each month, interest charges are unavoidable. Remember, with a credit card, you’re using loaned money. That comes with a cost. Paying interest on credit card balances is similar to the interest you pay on a mortgage.
3. Brace for Interest Rate Hikes
As punishment for missing a credit card payment, the credit card issuer will likely raise your interest rate. If you read the fine print of the prospectus that comes with the credit card, you’ll likely see what the new (higher) interest rate will be if you miss a payment. For example, instead of a 20% interest rate, a missed payment could push that rate higher by as many as five or even ten percentage points.
A higher interest rate on a credit card makes it more expensive to service any balances/debt that is kept on that card. You can try calling the credit card company to reverse the increase. But they’re likely going to request that you pay off the balance in order to even consider awarding you a lower interest rate.
You’ll have a better case in undoing the interest rate hike if you truly forgot about the payment, but paid the entire balance in full a few days after the due date. Again, the issuers are more likely to throw you a bone if it’s your first time making a mistake.
4. Credit Score Woes
Missing a credit card payment is one of the best ways to ruin your credit score. Having a high credit score is crucial if you’re in the market for a mortgage or auto loan. That’s because a higher credit score usually results in a lower interest rate on these kinds of loans, making the monthly payments less expensive.
The lower your score, the higher the interest rate will be on a mortgage. Basically, the lender wants to be paid more for loaning you money because if you have a low credit score, you’re considered a risk in the eyes of the bank.
Here’s how missing a credit card payment hurts your score:
One of the biggest components of your credit score is your utilization ratio. Let’s say you have a $10,000 credit limit. That means you’re allowed to charge up to $10,000 worth of expenditures on the card.
If your payment is $5,000 and you fail to pay it, your utilization ratio is now 50% (5,000 divided by 10,000). This is too high of a ratio. Had you made that payment in full, your utilization ratio would have been zero.
A typical rule of thumb is to keep your utilization ratio under 30% in order to maintain a better credit score. Leaving a balance on a credit card shows prospective lenders that you’re not responsible with money or are facing financial hardship. They may be reluctant to lend money to you via a mortgage or a car loan if they see you’re not able to handle a credit card without getting into debt.
5. Limited Credit Card Flexibility
Let’s stick with this example of a credit card with a $10,000 credit limit. If you have a $5,000 balance, you only have $5,000 of remaining credit (10,000 – 5,000-5,000). This means you can only use the credit card to charge $5,000 worth of expenditures.
But if you’re relying on your credit card to pay for necessities, you may find yourself struggling to cope with the dwindling levels of remaining credit. It’s only until you pay off the owed balance that you can free up more of the card’s credit limit.
With that $5,000 balance on the credit card, if $2,000 of this is paid, then the available credit limit on the card increases to $7,000 (5,000 – 2,000 leaves a 3,000 balance. 10,000 – 3,000 = 7,000). This is more in line with that 30% or less utilization you should strive to maintain.