What happens when you don’t pay your credit card?
When a person doesn’t make payment on a credit card for six months, it becomes a “terminal delinquency.” At that point, the creditor may charge it off and try to collect money via their own bad debt department, or they can sell the account to a collection agency.
Depending on either of those actions, it becomes a charge-off or a collection on the credit report.
Points are deducted from your credit score based on the date the account went delinquent. The more recent the Date of Last Activity, the more it hurts your score.
Here’s what can happen.
If Visa sells a charged off account to Paradox Collections, Visa is supposed to change the balance to $0, because you now owe payment to Paradox. If Visa still shows an open balance of $1,500 (or whatever sum), that is a violation of the Fair and Accurate Credit Reporting Act. You no longer owe Visa; you now owe Paradox.
If Visa shows the charge-off with a $0 balance and Paradox shows the collection with a $1,500 balance, then it is posted properly. Your score is docked twice for the two negative entries on your report.
But hold on! Paradox might show your balance as $1,700, because they have added $200 in fees. They are within their legal rights to add interest rate charges and fees, per the state law.
The balance may keep increasing each month if state law allows it.
And it could get worse!
Paradox might file a motion in court to claw money right out of your bank account, or to garnish funds straight out of your paycheck.
For doing this legal work, they might add $500 in attorney fees. (Again, per state law. In Washington state, it happens all the time.)
As you can tell, the debt can snowball into a avalanche.
You must never ignore a bill or a debt that you owe.
If you move to another address and don’t receive the bill and forget all about it, that does not excuse you or exempt you. You are responsible to inform your creditors of your new address and to keep abreast of your financial obligations.
If you were on auto-pay and close the bank account and move to a credit union, so that the creditor doesn’t receive payment, the delinquency will be on your credit report. You don’t get to forget to make payments.
If you go on vacation or get married or sail off to Survivor Figi, you don’t get to skip payment.
The credit card companies are not your nice grandma. They won’t give you grace and forgiveness (except in rare circumstance, and don’t count on that).
If you want to get ahead in life, you must take responsibility for tracking all your debts and pay on time. Have a savings account as a safety net in case you’re out of work for a period of time.
Live within your means. Don’t use your credit card to buy stuff you can’t afford to pay with cash.
Don’t go on so-called retail therapy spending sprees if you get depressed. If you do, you will be digging yourself into a deeper depression later.
Dear Nice Person…
I hope this post doesn’t sound too harsh. Please take it as helpful advice from a licensed mortgage advocate who cares about helping people get ahead credit-wise. It’s a good feeling to have A+ credit and receive the respect from everyone you do business with.
Make that your goal, and you will get there. If you had mistakes in the past, dust yourself off and move forward. America loves a come-back!
Stage your own come-back and build the awesome credit report you deserve.
Pick up a copy of Build and Protect Your Credit Like the Pros here.
The Fair Credit Reporting Act includes Statutes of Limitations on how long negative credit can remain on your credit report. Here is a quick list for your reference.
Late Payments: 7 years from the late payment date
Collections, Charge-Offs: A late account becomes a collection or charge-off after it is 180 days past due. It must be removed 7 years after the last date of delinquency.
Chapter 7 Bankruptcy: 10 years from the file date.
Chapter 13 Bankruptcy: 7 years after the file date.
Judgments: These are more complex. They have a Statute of Limitations of 7 years; however, they may be revived at any time by the judgment holder, making them last indefinitely until paid.
Unpaid Tax Lien: Forever, no Statute of Limitations.
Paid Tax Lien: 7 years from the date of release.
Word of Advice: File the release with your courthouse so the 7-year clock starts.
Hot Tip: If an IRS tax lien is less than $25,000 and paid, you can use IRS Form 12277 to have it removed within 90 days.
Heartfelt thanks to Chad Kusner, President of Credit Repair Resources LLC, for this information.
Are you curious about how credit repair specialists and certified credit attorneys legally delete bad credit?
Kate W. wrote to tell me that her credit score increased from 613 to 720 after following the system in Repair Your Credit Like the Pros.
“My score has improved 63 points in 15 days.”
~ Posted by user name Amazon Customer
“I have read many credit repair books, but none of them helped me like this one. The book has real advice that has been used and actually works.”
~ Tiffany H., Amazon review
Q: Hi Carolyn, We have our eye on a house and it’s perfect for us. We owed the IRS money and have been paying on it for the past four years and have only one year to go. We have never missed a payment. Our other credit is perfect, and our household income is $105,000. We pay off our credit cards in full each month and have a car payment of $250/mo. Can we buy this home?
A: I’ve been asked this question quite a lot lately. For some people, they have a tax lien, either from the IRS or a state tax lien. For others, they have a judgment from an old, unpaid bill. Either way, the verdict is the same.
When you have a lien or judgment, it blocks a mortgage from recording in first position. This means that the mortgage lender would be second in line to get paid, behind the IRS or other creditor, should you default on the loan. This is unacceptable and will never happen. So NO, you cannot close a mortgage until the lien or judgment has been paid in full.
The fact that you’ve been making payments on time does not help. If there is even $1 owing, the lien or judgment is in place, blocking the mortgage. That is the legality of the situation. (And that is one of the reasons why an unpaid creditor will go through the process to place a lien or judgment against someone.)
“What if the lien or judgment doesn’t show up on my credit report?” some people have asked.
You still cannot get around it, even if it doesn’t show up on your credit report. The lender will discover it and your loan will not close. Even if you were approved already, once the title report comes in and the lien shows as tied to your social security number, your loan will promptly flip into a big, fat denial. And believe me, it’s not fun having the rug ripped out from under your dream house at the end of the process.
There are two ways you can buy a house with an existing tax lien or judgment:
1) Find a private party seller who will act like the bank and carry the loan for you. Some people don’t need all their cash up front and are happy to carry a contract for 8% – 10% (the typical rate for such a loan). Usually, the term is set for five years with a balloon payment for the balance due. At that time, you would get financing with a bank to pay off the seller.
2) Pay all cash for the property.
If you know anyone who is in this position, please refer them to this information. A lot of people think they can hide their tax lien or judgment and get a home loan closed — but that is a BIG mistake! There is no reason to have a real estate agent running all over town finding you the perfect home when it is a legal impossibility to close your mortgage. And there is no reason to get your own hopes up before your lien or judgment has been paid in full.