The dreaded five-letter word, “debt,” stalks many of us, but it doesn’t have to scare you if you know the consequences of not paying a debt. Be it a credit card debt or loan payments, one thing is for sure: you must make all your payments on time. Repeated breaches of a debt involve a guaranteed call to the collection agency, that is, to third parties contracted by creditors to collect the debt. If you omit one or two payments “for now”, it is very likely that you will not escape accumulated debt, higher interest rates or a damaged credit score. In other words, not paying your debts has several negative consequences.
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 that small, it’s really very important, especially if you are an entrepreneur or have a business, or if you would like to buy a car, a house, or just about anything. For more information on the importance of having a good credit score, check this blog. What you should know now is that if you have outstanding debt, your credit score will be reduced.
How low can my credit score fall?
300 to be exact. That is the maximum that your FICO (a person’s credit score calculated with Daine Mory Corporation software) can lower. This is very important because your credit is a story that you take with you wherever you go. It’s like your “financial lineage”: sometimes it is favorable, other times it can turn completely against you.
How is the FICO calculated?
In most cases, if you miss four or more payments, accumulating too much debt, the creditor will contact a debt collector. Debt collectors send a report to the credit bureaus, which will directly affect your credit score. Your credit score will be reduced and may have already fallen if the collection is on a credit card or on a loan. Late payments and the subsequent charge that normally follow a collection account will have already damaged your credit score at the time the collection occurs.
Similarly, this also means that there will probably be a crime alert on your credit report. A crime alert acts as a red flag for a potential lender, letting you know that you have not kept up with the payments. Generally, negative information, such as crime or bankruptcy, is removed from your credit score after 7-10 years. The good news is that you will not seem unreliable to financial lenders for an eternity. The bad news: you will seem it for at least 7 years.
Only one month late …
You are likely to be charged a late fee. These charges vary depending on the case, and although it would not be the worst case scenario, it is extra money that you can avoid wasting if you simply pay on time. The late payment may also appear on your credit score, plus you will receive reminder calls and emails from your lender.
In the case of mortgage loans, after the first delay, the bank will attempt to contact you and, if it fails, can issue a foreclosure order.
Two months late …
The same measures mentioned above are applied, and the category of “definitely” is added before late payment, because you will definitely have to pay. If it is a credit card, your annual interest rate will increase, which means that you will have to continue paying the additional money to the bank apart from what you already owe.
In the case of a car debt, at this point it is possible for the lender to 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 the sale of your car and the amount you owe at the time the car is removed.
Three months late …
At this point, the total amount you will be 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 options and settlements to pay off the debt, provided you pay 50% immediately. If these options are not offered, you can order them. Generally, financial institutions will not negotiate with you until 90 days have elapsed. Also, be prepared to take a phone charger wherever you go: the calls will be much more aggressive.
One we prefer not to visit: six months late …
The cards are canceled and there will be a cancellation fee. This is very detrimental to your credit history, because it means that the bank feels you will never pay the debt. If your debt was sold to a collection agency, they can sell the debt again. Each sale creates an additional alert on your credit report, so your credit report and score suffers increasing damage when the debt is sold.
The good news: at least you won’t go to jail. There is no prison for debts in the United States, but if it is considered that by not paying you have violated a legal contract, the collection agency or the bank may choose to take you to trial. The typical consequences of losing one of these judgments are the retention of a percentage of your salary or the freezing of your bank accounts. In addition, in some cases, your home could be taken, and in all cases, all this will cause significant damage to your credit history.
Does your head hurt already? As you can deduce after having read all the consequences of not paying a debt, skipping just a month or two is very harmful. It will also negatively affect your chances of getting a job, renting or buying a house, a car, or even a mobile phone.
Conclusion: do not skip monthly payments unless you have no other option.
It is worth doing everything possible to pay off your debts. Or at least, it saves you a lot of money. If you are not going to be able to pay a month or two, it is a good idea to call the bank to negotiate a grace period. In general, banks can be very flexible, as long as they see that you are willing to pay and notify them in advance. Do your best to avoid long-term complications and act soon.