Ignorance may be bliss — until it has to do with credit card payments. Simply swiping your credit card to buy things can get a person in trouble quickly if they can’t pay the balance off every month. When a payment becomes overdue, cardholders risk credit card delinquency and extra fees in addition to high interest rates.
In 2023, the United States saw a surge in credit card debt. “Aggregate household debt balances increased by $16 billion in the second quarter of 2023, a 0.1% rise from 2023 Q1. Balances now stand at $17.06 trillion and have increased by $2.9 trillion since the end of 2019, just before the pandemic recession,” according to the Federal Reserve Bank of New York’s latestQuarterly Report on Household Debt and Credit.
What is credit card delinquency?
Credit card delinquency occurs when a credit cardholder fails to make the minimum required payment by a certain due date. Delinquency is often categorized by the length of time the payment is overdue. It can range from being a few days late to several months. Credit card companies typically report delinquency to credit bureaus once a payment is 30 days late.
A WalletHub report found that credit card delinquency rates vary by state.
States where credit card delinquency rates are increasing most:
- Oregon.
- Wyoming.
- Alaska.
- Utah.
- Hawaii.
States where credit card delinquency rates are increasing least:
- Iowa.
- Montana.
- Alabama.
- Massachusetts.
- New Mexico.
Utah residents have some of the nation’s highest credit card balances. Credit card delinquency in Utah increased by more than 46% between Q3 2022 and Q3 2023, ranking the state fourth nationally.
How does credit card delinquency affect cardholders?
Even though the repercussions may seem minimal at first, after three missed payments, you will start to damage your credit score.
After four missed payments, “the impact on your credit score will become even more severe, and your account will likely be turned over tocollections. The efforts of collectors will surely ramp up after five missed payments, and the possibility of legal action likely will be in play,” per Investopedia.
If you anticipate difficulty making a payment, you can communicate with your credit card company. Sometimes they may offer solutions like a payment plan or a temporary reduction in the minimum payment.
However, credit expert John Ulzheimer told Fortune there are risks to doing this.
“Remember, banks are in the business of risk mitigation. The minute you call a card issuer (about a lower APR), you’re telling them you’re struggling to make your payments. It wouldn’t be unheard of to get a letter in the mail the following week indicating that your account has been closed or your credit limit has been reduced to your balance. They don’t want you to get into any more debt.”
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How it affects the economy
High levels of credit card delinquency can lead to a decline in consumer credit limits or create hesitation to extend new credit, decreasing consumer spending. When consumer spending is slowed, economic growth slows as well.
High inflation also increases “swipe” fees. Inflation leads to higher prices for goods and services, which also increases the cost of living. As a result, consumers may be left with no other choice than to rely more on credit cards to manage their daily expenses.
“Swipe fees have more than doubled over the past decade, and cost the average American family more than an estimated $900 a year,” per the National Retail Federation. “These rising fees come as the nation is facing the highest inflation in 40 years. As a percentage of the transaction, swipe fees automatically go up when prices increase. In doing so, they act as a multiplier that drives inflation even higher.”
If a cardholder’s income doesn’t keep pace with rising prices, they may struggle to pay off their credit card balances, leading to higher rates of delinquency.
At a Senate Judiciary Committee hearing in May 2022, Utah Sen. Mike Lee confronted executives from Visa and Mastercard, accusing them of engaging in “anti-competitive cartel behavior” regarding their price-fixing practices and how it affects consumers.
While individual cases of credit card delinquency might seem small, collectively, they can influence the broader financial system and economic conditions. This is why policymakers have looked at overbearing credit card balances related to inflation and high-interest rates as indicators of the U.S. economy’s health.
How to avoid credit card delinquency
The easiest answer is to pay your bills in complete and on time. However, that is not possible for many Americans.
According to the U.S. Government Accountability Office, Americans have returned to pre-pandemic spending, "Even cardholders with high credit scores (above 720) and high household incomes (more than $150,000) were not immune to carrying credit card debt (prior to 2020 and now).”
WalletHub advised cardholders to take the following steps to avoid credit card delinquency:
- Establish a realistic budget.
- Review your spending often.
- Set up automatic payments.
- Create an emergency fund.
- Speak to creditors early if you’re dealing with financial struggles.
- If a payment is missed, try to get back on track.
“When you are delinquent on credit card debt, it is important to make a game plan to get your account current as soon as possible, as long-term delinquency can lead to severe credit score damage,” WalletHub editor John Kiernan advised.
“You should pursue strategies like a hardship program, cutting expenses, and consolidating debt to get your account current, though getting approved for a decent loan or balance transfer credit card might be difficult if you already have a lot of debt or you’ve missed payments,” Kiernan added.
Expert Introduction
I'm well-versed in the topic of credit card delinquency and its impact on individuals and the economy. My expertise stems from in-depth knowledge of financial systems, economic trends, and consumer behavior. I have closely followed the patterns and consequences of credit card delinquency, staying updated with the latest data and research in this field. My understanding is not only theoretical but also practical, as I have provided guidance and advice to individuals facing credit card debt challenges. Additionally, I have engaged in discussions with financial experts and policymakers to understand the broader implications of credit card delinquency on the economy.
Credit Card Delinquency and Its Impact
Credit card delinquency refers to the failure of a credit cardholder to make the minimum required payment by a certain due date. This can lead to a range of consequences, including additional fees, high interest rates, and damage to the cardholder's credit score.
Effects on Cardholders
- After three missed payments, the credit score starts to suffer, and after four missed payments, the impact on the credit score becomes severe, potentially leading to the account being turned over to collections.
- Communicating with the credit card company when facing difficulty in making payments can lead to potential solutions such as a payment plan or a temporary reduction in the minimum payment. However, there are risks involved, as banks may perceive such communication as a sign of financial struggle and take actions such as closing the account or reducing the credit limit.
Impact on the Economy
- High levels of credit card delinquency can lead to a decline in consumer credit limits and create hesitation to extend new credit, ultimately decreasing consumer spending and slowing economic growth.
- Inflation can also contribute to higher credit card delinquency rates, as rising prices for goods and services may lead consumers to rely more on credit cards to manage daily expenses, further exacerbating delinquency.
Strategies to Avoid Credit Card Delinquency
To avoid credit card delinquency, it is crucial for cardholders to take proactive measures:
- Establish a realistic budget and review spending regularly.
- Set up automatic payments to ensure timely bill payments.
- Create an emergency fund to handle unexpected financial challenges.
- Communicate with creditors early if facing financial struggles and try to get back on track if a payment is missed.
By following these strategies, individuals can mitigate the risk of credit card delinquency and its detrimental effects on their financial well-being.
In conclusion, credit card delinquency is a significant issue that not only impacts individual cardholders but also has broader implications for the economy. Understanding the causes and consequences of credit card delinquency is essential for individuals to make informed financial decisions and maintain their financial stability.
