Credit Card Default: Top 5 Consequences & What to do? - Kotak Bank
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11 MAY, 2023

Credit cards have made it easy to make purchases for which you can pay later. They allow us to make purchases on credit and offer several benefits such as cashback, reward points, and discounts. Your bank pays for the transactions you make and you have to pay later for the same. However, there can be times when you might find it difficult to repay the spent amount as per the credit card billing cycle due to loss of job, business failures or medical emergencies. In such a case, you might find it difficult to repay the bill. If you fail to pay your credit card bill on time, you may face several consequences, one of them being a credit card defaulter.

In this blog, we will discuss the top five consequences of a credit card default.

What is Credit Card default?

When you fail to repay the minimum amount due on your credit card bill for several months, then it is called a credit card payment default. Your credit card account will first become delinquent if you fail to make a payment for 30 days. If you continue to remain delinquent for six months, without making any minimum payments, your account will then enter into default.

Your bank will contact you to understand your situation when are delinquent on your payments to understand your repayment strategy. If you do not pay even after this, your account is closed and a no-payment report is sent to the credit bureaus. This affects your credit score negatively which will make it difficult to take a loan or get a new credit card in the future.

What are the 5 Consequences of Credit Card Default?

1. Late Payment Fees and Interest Charges

If you fail to pay your credit card bill on or before the due date, you will be charged a late payment fee by the bank. In addition to this, the bank will also charge you interest on the outstanding balance. The interest rate can range from 2.5% to 3.5% per month, which can add up to a significant amount over time.

2. Negative Impact on Credit Score

A credit score determines your creditworthiness. It is calculated based on your credit history, including your credit card payments. When you default on your credit card payment, it can have a negative impact on your credit score. This can make it difficult for you to get loans or credit cards in the future. A low credit score may also result in higher interest rates and lower credit limits.

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3. Legal Action

Your bank may take legal action against you if you fail to pay your credit card bill for an extended period. The bank can file a civil suit against you for recovery of the outstanding amount. In extreme cases, the bank may also file a criminal case against you for fraud. This can result in legal expenses and a tarnished reputation.

4. Debt Collection Agencies

If you don't make your credit card payment on time, the bank may work with a debt collection agency to get the money back. Debt collection companies may contact you aggressively and harass you with calls and letters. They might even pay you a visit at your place of business or residence. If they visit your office, this may be embarrassing and cause tension and anxiety.

5. Decreased Credit Limit

When you default on a credit card payment, you appear as a high-risk borrower to others. To reduce their own risk, they may limit the amount of credit available to them. This can lead to a decrease in credit limits on your other credit cards. As a result, your credit utilisation rate may increase, which can negatively impact your credit score and invite further complications.

What to do in case of a Credit Card Payment Default?

If you become a credit card defaulter, then there are certain steps you can take to resolve the issue.

  1. Contact Your Bank: The first thing you should do is contact your bank and explain the situation. They may be able to work out a payment plan or offer other solutions to help you get back on track without your credit score getting affected negatively.
  2. Make a Payment: If possible, try to make a payment towards your outstanding balance to avoid further damage to your credit score. Even a partial payment can help show your intention to repay the debt.
  3. Negotiate with Your Bank: You may be able to negotiate with your bank for a lower interest rate, reduced fees, or a waiver of late payment charges. Be honest and transparent about your financial situation to increase the chances of a favourable outcome.
  4. Seek Professional Help: If you are struggling to manage your debt, consider seeking the help of a credit counsellor or a financial advisor. They can help you develop a plan to manage your debt and get back on track.
  5. Monitor Your Credit Score: Keep a close eye on your credit score and credit report to ensure that there are no errors or inaccuracies. Make sure that your bank reports your payments accurately to the credit bureaus and that your credit score reflects your efforts to repay the debt.

To get a credit card, you can reach out to us for the same. But before getting one, you need to know the credit card eligibility which is given below.

  1. Age: You should be between the age of 21-65 years.
  2. Annual Salary: Your annual salary must be Rs. 400,000.
  3. Employment Status: Any salaried or self-employed individual can apply for the same.
  4. Credit Score: A minimum credit score of 750 is ideal for getting a credit card.

Apart from these, factors like existing debt, timely repayments and the number of credit cards affect your chances of getting a credit card.

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Defaulting on your credit card payment can have several consequences, including late payment fees, interest charges, a negative impact on your credit score, legal action, debt collection agencies, and loss of credit card benefits. Therefore, it is essential to make timely payments and manage your credit card responsibly. If you are facing financial difficulties, it is best to contact your bank and discuss your options to avoid defaulting on your credit card payment.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.