What Happens If You Can’t Pay For Your Credit Card

Written by Marc Adrian

It is very alarming indeed when you suddenly find yourself at arms length from your death sentence: this month’s astronomical credit card bill. Impulse shopping finally caught up, just when you forgot to factor in the compounding interest to your computation. Reeling from panic — nope, you don’t need to go there just yet. You can still remedy the situation!

My bill just came in and it’s too large to settle, help!

Breathe first, then take a good look at your credit card bill. There are two important details you need right now: the Minimum Payment (or Minimum Amount, or Minimum Amount Due) and the Due Date.

Before banks issue you a credit card, they’ve already taken into account how much you’re earning per month, and they will give you a ceiling of how much you can charge on credit based on your monthly salary. If you happen to max your limit, banks already made sure you’ll be able to more or less settle the minimum payment, which is roughly about 5% of what you owe.

If you feel daunted by your credit card bill, it’s OK to settle it in installments. Just be prepared to shoulder the interest rates and other finance charges.

Gather your wits and determine how much you can actually pay for the month. This amount should be greater than or equal to the minimum payment indicated on your bill. And make sure to settle it before the due date!

After getting through this month, you also need to brace yourself for the months ahead. Avoid using your credit card until you feel confident you’ll be able to settle the remainder of the debt. Otherwise, you’ll be back at where you started the month before.

And if you’ve settled only the minimum amount, you’ll notice that this hardly made a difference when you receive your next bill. Paying for the minimum amount due will only be enough to pay for the interest and finance charges, and maybe a nick off the base amount that you owe. So in planning ahead, make sure to allocate a bigger portion of your salary to pay off a couple of thousands more than the minimum amount and settle your debt sooner.

Another option you can consider is having a balance transfer. Several banks such as Citibank, BDO, BPI, EastWest Bank, Metrobank and HSBC allows you to convert your credit card debt into manageable fixed monthly payments. Some banks would even allow you to transfer your balance from a different bank.

Balance transfers are a good way wiggle yourself out of debt. Rates average at 0.6% per month, which are lower than most credit card’s 3.5%. Of course, you need to have a decent credit rating to get approved. And make sure to do your homework first to compare rates and compute if you’re getting yourself a good deal and not getting yourself deeper in debt.

What will happen if I can’t pay even the minimum amount by the due date?

This definitely sounds like trouble — yes, it is, and it has several implications.

“The day after your due date, the bank’s system will immediately tag your account as unpaid if no payment has been posted to your account,” Credit Card Association of the Philippines Executive Director Alex G. Ilagan told iMoney via email. “After another 30 days, your account may be blocked and you can no longer use your credit card,” he said.

If somehow you’re able to turn this around, and managed to pay at least the minimum amount couple of days late, or within the 30 day window, then good for you! You have averted the imminent danger of defaulting and the hassle of having to reapply for a credit card. But do take note that this incident will reflect negatively on your credit score. To know more about credit score and credit history, read Credit Reports In The Philippines — What You Need To Know

Aside from getting a negative rating, late payments are also slapped with penalty fees which can range from 4% to 7% of your total amount due, depending on your bank. Add this to the 2.5% to 3.75% compounding interest you’ll incur per month, and you’ll shell out an extra 6.5% to 10.5% on top of your debt each time you pay late. (And if you only settle the minimum amount, it may not even be enough to cover the penalty fees!)

However, if you’re really strapped for cash, and after three months, you’re still unable to pay for your credit card, then your debt will now be tagged as default. Being in default means you failed to pay your debt obligations at the agreed terms. For credit card accounts, this means you failed to pay the at least the minimum amount due for three consecutive months. And this will have serious consequences, for both short and long term.

“If you fail to pay at least the minimum amount due on your credit card for three consecutive months, your account will be cancelled and your name will be included in the negative file which is shared with other banks,” Mr. Ilagan said. “This will prevent you from applying for new cards or other types of loans,” he added.

So, aside from being unable to use your credit card once your account is suspended or eventually cancelled, but you will have to reapply again if you want to use your card in the future. And it will be much harder to get approved this time around, not just for a credit card, but for all types of loans, such as personal, salary, housing, or auto loan, with any bank.

Banks will be cautious to lend you money, not just the one you defaulted on. This can hit you hard especially once you need to borrow money for an emergency, for example when you need to fix your home after it gets damaged by storms or floods, or if someone from your family gets hospitalized for a serious condition.

How can I prevent this from happening?

As soon as you realize you won’t be able to pay for your credit card bill, the best option to take is to negotiate with the bank for a restructuring of your debt.

“This will involve providing the bank with proof that you can repay your debt if you are given a chance to pay it over a longer period in instalments, usually ranging from 12 months to as long as 60 months depending on the size and age (number of months past due)  of your obligation, your source of repayment (e.g. your present income, co-maker’s income, properties, other sources, etc.) and the internal policies of the debtor bank,” Mr. Ilagan said.

Banks would be more than willing to accommodate a negotiation rather than having their clients default on their debt. And make sure you stick to whatever new arrangement you made with your bank. This means paying the specified amount within the date agreed upon. Otherwise this will spell more trouble for you.

“Financial discipline and living within your means are the best ways to prevent over indebtedness,” Mr. Ilagan advised. “Never take on debt obligations that your cash flow cannot handle.  And always be ready for unexpected emergency situations or life events ( e.g. sickness, loss of job, death in the family, etc) that could trigger a sudden increase in household expenses that will disrupt your normal cash flow,” he said.

Want to know how to fix a bad credit history? Here are six ways to boost your financial credibility.