Secured credit cards are much more accessible than their unsecured cousins. They generally don’t need a high credit score or even a credit history, which can be a relief for a consumer with no or poor credit. In general, you can qualify as long as you can pay the security deposit. The credit card issuer also benefits. Since the line of credit is secured by your security deposit, their risk of lending you money is minimized.
However, problems will arise if you do not make your payments as agreed. Here’s what can happen if you fall behind and the different ways to make up for the damage.
What happens when you miss a payment
When you start using your credit card, the issuer will report your activity to the three major credit bureaus: TransUnion, Equifax, and Experian. This information will factor into your credit scores, so how you manage the card will affect these numbers. Paying on time helps your scores while paying late hurts them.
But there are other problems associated with missing payments. The longer an account remains overdue, the worse the situation will get:
- You miss the due date. The credit card issuer will send you a statement indicating the due date of the requested minimum payment. If you miss that date by even one day (or send less than the minimum payment), the issuer will add a late fee of up to $40 to the amount you owe.
- 30 days late. If you skip a full payment cycle and miss another due date, additional late fees will apply. The issuer will notify the credit reporting agencies that the account is overdue. When this rating appears on your credit file, it will be taken into account in your credit scores. Since payment history is the most important scoring factor, your scores may drop significantly. The issuer can also increase the APR of the card at a higher penalty rate.
- 60 days late. When another cycle has passed without payment, another late fee may be assessed and added to the balance. The issuer will notify the credit bureaus that the account is now 60 days past due. The longer you delay paying, the greater the damage to your credit rating. Chances are you’ll start getting notifications from the issuer that you’re overdue and need to send a payment. They may also ask you to contact them for assistance.
- 90 to 180 days late. Keep missing payment cycles and your credit scores will almost certainly plummet. You will receive more urgent communications from the credit card issuer, and each month that you do not pay, additional late fees will be applied. They can claim what’s owed on your security deposit and close your account so you can’t use it. If there are funds left, the issuer will refund the money to you. At this point, you may have racked up hundreds of dollars in fees and interest. If you still owe after the issuer takes your deposit, the issuer will likely send it to collections. Your credit report will show that the account is debited and a third-party collection agency now owns the account. The collection agency can then start calling you for payment.
What to do if you’re having trouble making your payments
It’s always best to address issues early, so call the credit card issuer as soon as you think you might be falling behind. You may be able to enter a hardship program where you pay less than the minimum payments for a few months without negative consequences. Even if the account is already overdue, contact them. Explain what happened and ask them if they can help you get back on track.
Here are two more options you can take before you miss payments on your secured credit card.
Moving the debt you carry on a high APR secured credit card to an unsecured balance transfer credit card with a 0% introductory rate can provide relief. No interest will be applied to the balance for a certain number of months, as long as you make the minimum payments. This part is critical: if you can’t keep up with the payments, the 0% APR will be forfeited and the fees you paid to transfer the debt (usually 2-5% of the balance) will be wasted.
Debt consolidation loans
If your secured card has a high interest rate and the balance you carry is also high, finance charges will add up quickly. Consider applying for a debt consolidation loan, as they usually have lower interest rates than credit cards. When you pay off the card debt with the loan, you get your security deposit back and can use it to clear some of the balance.
After that, all you have to do is make your payments on time. Loan payments are fixed, so they can be easier to manage than fluctuating credit card payments. Debt consolidation loans can boost your credit scores because the balance won’t factor into your credit utilization rate, the second most important credit scoring factor. The now empty credit card will have an open line of credit that can further help boost your credit scores.
Discount Rate Overview
Note: If you’re taking advantage of a balance transfer or debt consolidation loan, it’s important not to take on more debt because you’re paying off the balance. If you top up the now empty secured credit card again, your overall debt will increase and your problems will intensify as you struggle to make both payments.
Debt management plan
Nonprofit credit counseling agencies are dedicated to helping struggling consumers manage their money and financial obligations. They offer debt management plans that allow you to make one payment to the agency, which they pay to all your creditors. These agencies often negotiate for lower interest rates so you don’t pay so much in finance charges.
It’s not a loan, so you don’t have to qualify. Your regular monthly payments will be noted on your credit report and over time your credit scores may increase. Contact the National Credit Counseling Foundation or the Financial Advisory Association of America for a dismissal.
If your account is several months overdue or has already landed in a collection agency, you may be able to pay less than the amount owed. Debt settlements are possible for secured credit cards when the credit card issuer has already claimed the security deposit and there is an outstanding amount.
Settlements are usually arranged through a third party debt settlement company. The part you don’t pay is formally forgiven, which means you won’t be required to pay it again. Be aware, however, that settling a debt can negatively affect your credit rating since the creditor will report that it was settled for less than the full amount.
Frequently Asked Questions
How does a late payment affect your credit score?
FICO, the most popular credit reporting company, ranks payment history as the most important scoring factor, accounting for 35% of your score. Therefore, any late payment that ends up on your credit file will negatively impact your score. If you realize you are late shortly after the due date, you may be able to avoid the consequences to your credit by making this payment and asking your issuer not to report the incident.
If you have a long and positive history of using credit products and your credit rating is high, a late payment may have a more extreme effect than if your ratings were already low. Other factors are how much you owe, how many months you are late, how often you are late paying, and when the late payment was noticed.
What happens if you leave the United States without paying your credit card debt?
No matter where you go in the world, a debt remains a debt until it is paid or formally forgiven. While you are away, the credit issuer can take several different actions. He can sue you for the unpaid balance. If you’re out of the country and you don’t respond to the subpoena, the credit issuer can pursue the lawsuit and you could lose the case with a default judgment.
Any late payments that preceded this action will appear on your credit report for a total of seven years. Interest, fees and court costs will also apply. The credit card issuer will likely send the account to a collection agency. Collection agencies can also pursue debtors for unpaid balances.
Can you go to jail for credit card debt?
There is no debtor’s jail in the United States for credit card debt. In fact, they were banned by the federal government in 1833.