Miss one credit card payment and suffer the consequences

Thank goodness you’ll probably never have a run-in with a Hollywood-style gangland debt collector. He’s a thug who quickly resorts to threats of physical violence if he doesn’t get what he wants. That kind of thing is, of course, illegal. But in real life, a debt collector can stay within the law and still make your life miserable.

You do not want to fall behind on your credit card debt. That’s called default.

Video: The Consequences of Non-Payment (Family Guy)

Breaking promises to lenders

Default means that you didn’t do something you promised to do – namely, pay your bills on time. When you’re tardy, the card issuer can charge you a sizable late-payment fee and raise your interest rate to 30% or even higher. But that’s not all. The fine print of many credit card contracts includes a universal default clause.

credit card bill default

Default with one, default with all

One late payment can initiate not only late fees and an increased interest rate for that account, but increased rates on other accounts. If you are late paying bills from anyone to whom you owe money -- MasterCard, the electric company, your mortgage lender -- Visa has the legal right to raise the interest rate of your card. This is so important it needs to be said again: If you go into default on one credit account, you can be considered in default with all your other creditors. Your overall credit rating, which determines your future eligibility to obtain a car loan, a student loan, a second mortgage, goes down the toilet. Repairing the damage can take years.

Video: Suze Orman - Universal Default - Credit Cards

Harm to your credit score

clear up credit card debtCredit card issuers and other lenders use a number of factors to rate you as a credit risk. These factors are also used to calculate your credit score (or FICO score), a single number that tells lenders if and how much they should let you borrow. Among the factors are these:

  • Do you pay your bills on time?
  • How much debt do you have outstanding? If the amount you owe is close to your credit limit, your score will be hurt.
  • How long is your credit history? One that’s too short can be a detriment.
  • Have you applied for new credit recently? Too many new accounts can negatively affect your score.
  • How many and what types of credit accounts do you have? A mix can be good but too many can be bad.

What debt collectors can’t do?

If you don’t repay your creditors in a timely fashion, you may be contacted by a professional debt collector who, in essence, gets paid to annoy you until you cry uncle. The Fair Debt Collection Practices Act requires debt collectors to treat you fairly and outlaws some intrusive and dishonest behavior. Among other things, by law a debt collector cannot:

  • Contact you at inconvenient times, such as before 8:00 in the morning or after 9:00 at night, without your approval.
  • Visit you at home outside normal waking hours.
  • Visit you more than once in a month for each debt without your permission.
  • Contact you at work even though your employer disapproves.
  • Contact a third party, such as your lawyer, more than once.
  • Tell anyone other than you and your attorney that you owe money.
  • Threaten violence or harm.
  • Use obscene or profane language.
  • Imply that you have committed a crime.
  • Falsely state that your property or wages will be seized.
  • Give false credit information about you to anyone.

What you can do

That’s what the law says. But that’s not necessarily reality. Some debt collectors go to the limits of the law and beyond in trying to get debtors to pay up. You will likely feel harassed. If you believe a debt collector has acted illegally, file a complaint with your state attorney general's office and the Federal Trade Commission. You also have the right to sue a law-breaking collector for damages in a state or federal court.