What Happens when you Default on Credit

Defaulting on credit, whether it's a bank loan or a credit card, happens when you stop making payments on your debt obligations. Defaulting on credit is a clear-cut situation where an ounce of prevention is worth a pound of cure. Waiting only makes the problem worse. Here are some of the consequences of defaulting on credit:

• Interest and penalty charges add up quickly
• Collection agencies pursue you aggressively in an attempt to collect
• Wages may eventually be garnished
• Your credit score will drop, sometimes precipitously
• You will have to live with the emotional distress of not being able to pay debts

Early Consequences: Fees and Interest

Late payments almost always result in the imposition of late fees, often up to $35 or so. If you are over your credit limit (on a credit card), you will continue to amass over-limit fees. Furthermore, interest continues to accumulate on your debt, and credit card interest rates average around 16%. Credit cards designed for people with poor credit generally have interest rates of 20% or more.

Later Consequences: Collections Agencies

If your creditors give up on you, you're still responsible for the debt, and creditors may turn to collections agencies to help them collect on it. While collections agencies do have to abide by the rules of the Fair Debt Collection Practices Act, they are not known for being polite and friendly. They may call you at work or phone your coworkers and neighbors in an attempt to embarrass you into paying. They may sue you for the money, and if they win in court, a judgment will be filed against you. This allows the creditor to garnish wages or seize your bank accounts to collect what is owed.

The Major Consequence of Default: Wrecked Credit

The further along you get on the road to default, the more your credit rating will suffer. While one late payment won't do much to your credit, defaulting on debts can cause your credit score to take a nosedive, making it much more difficult and expensive to get a loan if you should need one. Some defaults are weightier than others with regard to your credit. Neglecting to pay a mortgage payment or a car payment is most detrimental, while neglecting to pay for a magazine subscription you forgot about will probably not be deemed that important. Negative information can remain on your credit reports for seven years, so it can take a long time to build up a good credit history again.

The Importance of Avoiding Defaulting

Not only is defaulting on a loan harmful to the borrower, but when large numbers of people default, it's bad for the economy as a whole. Ignoring debt does not make it go away, and the longer you wait to address a debt problem the more trouble it will be to get it all cleared up. If your finances are strained and you're worried about meeting all your monthly obligations, go ahead and call creditors and explain. They are much more likely to work with you before you find yourself into a desperate situation.

Sources:

http://creditcardforum.com/blog/credit-card-default-consequences/
http://everythingfinanceblog.com/2011/06/what-happens-if-i-cant-pay-my-credit-card-bills.html
http://www.goodfinancialcents.com/credit-card-default-debt-consequences-results/
http://task.fm/2011/12/what-are-the-consequences-of-credit-card-default/