What happens when you stop making payments on a credit card?

Written by
Geoff Williams
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If you stop making credit card payments, the first thing that will happen is that your credit score will probably take a hit. Beyond that, there’s no hard and fast rule about what will happen.

Under typical conditions, most banks classify an unpaid balance as bad debt after a borrower misses four or five consecutive monthly payments. Most lenders will also shut down an account when that happens.

Although banks can reduce their tax burden by writing down bad debt, they can salvage more cash by selling the right to collect a charged-off balance for pennies on the dollar.

If that happens, and a debt buyer purchases your credit card debt, technically and contractually, you might not really owe a debt buyer anything. However, as owners of the “paper” you signed with the original creditor, debt buyers can use an arsenal of tactics to get paid.

Even if debt collectors don’t scare you, the negative impact on your credit report can result in higher insurance premiums or reduce your chances of getting selected for a job interview. It can also impact your ability to get approved for a new credit card in the future.

Should I tell my credit card issuer if I need to stop making credit card payments?

You don’t have to, but it’s a good idea.

Nearly every major credit card issuer maintains some version of a “hardship bureau,” staffed with specialists who want to help you resolve your outstanding debt. These professionals have seen it all, and they can usually offer deferred interest, lower monthly payments or fee amnesty programs.

That said, if you are in a situation where you simply can’t make your credit card payments no matter what sort of break your credit card issuers are going to give you, it’s still a good idea to contact your credit card issuer – so they know where you stand with them.

Your odds of being better off and getting through this financially difficult period are going to be far better if you are honest about your financial situation.

What if my spouse has stopped making credit card payments?

First, the immediate impact on your personal credit score depends on whether your significant other has listed you as an authorized user. Some couples use this strategy to kickstart a spouse’s credit history, even though an authorized user doesn’t actually have credit of their own to utilize. In some credit scoring models, showing up as an authorized user for a long-held account can make your own credit history seem longer, boosting your score.

However, when your spouse’s creditor starts reporting those accounts as delinquent, you can request that credit agencies strike those items from your record.

Second, if your spouse racked up that debt before your marriage, you’re under no legal obligation to repay it if they can’t.

Unless you live in a handful of states bound by community property rules, you’re not even liable for that debt your partner took on after your wedding date. In most cases, if you never signed an agreement with a creditor, you don’t owe that money. That said, expect some high-pressure phone calls from bill collectors who will try anything to collect that money from you. Say nothing to them over the phone, other than to request that they do not contact you by phone again.

Your partner’s delinquency will start to show up on their credit report, which can hurt you if you’re jointly shopping for good rates on mortgages, auto loans or insurance. All three of those products use credit scores to evaluate how much you’ll pay in service fees and finance charges, meaning that you may have to go at it alone (and report only your income) on future applications. In some states, employers even use credit reports during background checks, narrowing the field for potential jobs.

Can I settle my debts with a credit card company?

In many cases, yes, you can, and in some instances, that can be a good idea.

In a best-case scenario, your lender can qualify you for a kind of balance transfer offer that will require you to close your existing account. In exchange, you’ll get an extended period to pay down your debt at a very low APR, but with no charging privileges. That means your monthly minimum payment could end up a fraction of what you’re paying now.

It’s important to note that a few things will happen while you’re on this type of program:

  • Other credit card issuers may scale back your credit limits.
  • Your credit score may drop, since your hardship account will report either as being closed or at 100% utilization.
  • You won’t qualify for most instant approval credit card offers.

However, these effects are small change compared to the impact of your account racking up multiple missed payments or going into delinquent status.

You’ve also probably heard stories about credit card companies willing to settle out accounts for a fraction of the balance due. This happens, but it’s rare. More to the point, it usually happens only at the very final moment before your bank decides to sell the right to collect on your account to a third-party debt buyer. By this time, the damage to your personal credit will overwhelm any perceived savings you achieve by paying out a smaller lump sum.

As you can probably guess, the consequences are sometimes not too great.

If you owe a lot, and you ignore the calls and mail from debt collectors, you may start getting stern letters from attorneys.

If you go to court over the money you owe a credit card issuer, that’s when things can get really serious. Debtor’s prisons are a thing of the past, but you could see your wages garnished after you do find a job, plus you’ll have the burden of paying court costs, and so this debt and all of its headaches could be with you for a long, long while. And, of course, your credit score, not to mention your savings, will be heavily depleted when it’s all over.

But don’t despair. Working something out often can be done with credit card companies.

If you can’t stomach the thought of contacting your credit card company, probably your best bet is to find a local debt counselor through a reputable credit counseling service like the National Foundation for Credit Counseling. If you feel you can pay something, at least once you do a get job, they’ll either be able to negotiate with your credit card companies and other lenders, like the auto loan you’re struggling to pay, so you can make smaller payments, or they may be able to help you in another way, like steering you to a good bankruptcy lawyer.

That may not be what you want to hear, but that may be your only logical option.

Bankruptcy isn’t fun, but it isn’t the end of the world. People need to realize that. Bankruptcy is designed for people to get a fresh start.

But the bottom-line is – if you owe money to credit card companies or any lender, and you can’t make the payments, stay in touch with them and be brutally honest about your situation. The worst things that you’re imagining, like wage garnishment, could happen if you say nothing, and the lenders assume you have no interest in ever paying them back.

And if you don’t have any interest, that’s where bankruptcy may come in. But you are always going to be better off with mounting credit card debt that you can’t pay off if you work with your lenders to try and come up with a solution that you both will be happy with.

Geoff Williams
CardRatings Contributor

Geoff is a freelance journalist and has been since the 1990s. He specializes in personal finance and small business issues and has seen his work published with numerous news outlets including The Wall Street Journal, CNNMoney.com, Reuters, The Washington Post and Consumer Reports. He also...Read more

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