Credit cards are incredibly handy if you want to pay for various purchases without any immediate financial outlay. You also get many rewards and offers from credit cards today. However, if you’re not careful about promptly repaying your dues, it may lead to credit card default.
Many cardholders are unaware of the consequences of defaulting on credit card payments. What’s more, some people are not even aware that a credit card default is possible. If you too are unfamiliar with this, let us understand whether it is possible to commit this financial error and how it occurs.
The short answer is yes. It is possible to default on your credit card dues. Data from the central bank reveals that credit card default rose by Rs. 951 crore year-on-year from FY22 to FY23. A credit card default occurs when you repeatedly fail to make even the minimum amount due (MAD) payments on your card.
The grace period or the number of delayed repayments that an issuer is willing to withstand before tagging your account as a defaulter varies. However, it is typically around 6 months. The issuer may reduce or increase this as they see fit. So, to avoid the issue of credit card default altogether, it is advisable to pay your credit card bill in full within the due date.
In case you default on your credit card, you may face several financial and legal consequences. It’s advisable to know of these in advance, so you can take measures to avoid a credit card default altogether. So, check out what happens if you default on your dues.
If you fail to pay the dues on your credit card, the issuer will levy late payment fees and interest charges on the unpaid amount. Since credit cards are high-interest debts, the finance or interest charges can quickly add up over time and lead to significant liabilities.
A credit card default also directly impacts your credit score adversely. This could make it difficult for you to secure credit in the future. Most banks and lenders now resort to credit card default prediction to assess the risk a borrower poses before they approve any loan application.
The credit card issuer may also freeze your account temporarily or block it altogether in case of a default. This essentially prevents you from using any available credit limit in the account until you repay the amount due.
Credit card default may also result in legal action if the card issuer files a lawsuit against you. Debt recovery agents may call you repeatedly to secure the funds needed to reverse the default and settle your dues.
Needless to say, a credit card default can be taxing both financially and emotionally. However, if you find yourself in this situation, you need to have a plan in place to get out of this financial trap. Here are some things you can do if you have been flagged as a credit card defaulter.
Prioritise paying off the dues on high-interest credit cards first. This will reduce at least some of the debt burden and reverse the default on some cards.
If you do not have liquid cash to repay the dues, you may have to redeem some investments or assets or look for additional sources of income.
Both individuals and companies can file for bankruptcy in India, although the process is more streamlined for the latter. If you declare bankruptcy, your assets will be distributed to the creditors as per the court’s orders.
The bottom line is that credit card default can have serious financial consequences. If you use credit cards, ensure that you pay the minimum amount due, at the very least. That said, it is always financially in your best interests to repay your credit card dues in full within the due date. This will ensure that your credit score is not adversely impacted.
By repaying your dues on time and avoiding credit card default, you can continue to enjoy the benefits your card offers. If you're looking for a credit card that gives you the best bang for your buck, the Fi-Federal co-branded credit card is what you need. With this card, you're assured of a 2% valueback through rewards. But that's not all, as you'll also get 5x on your top 3 brands, 2x on all partner brands listed in the Fi Collection and 1x on everything else, including rent and fuel. What's unique is that you earn points through Fi-Coins. Oh, and the welcome offer includes exclusive vouchers from top brands worth ₹5,000!
In case of a credit card default, the issuer will levy late payment charges and interest on the unpaid amounts. The credit account may be frozen or closed, and the cardholder’s credit score suffers.
Defaulting on the credit card dues significantly reduces the cardholder’s credit score. This, in turn, adversely impacts long-term financial health by limiting access to credit facilities in the future.
Defaulting on your credit card dues could lead to legal consequences because the creditor may file a lawsuit against you. This could lead to increased calls and visits from debt collection agents.
In the case of a credit card default, the cardholder’s credit score will significantly reduce. This, in turn, adversely impacts the person’s ability to secure future credit.
Individuals can manage the consequences of credit card default by negotiating payment plans or settlements with creditors. If facing lawsuits, it’s crucial to seek professional legal assistance.