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Consequences of Credit Card Default

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Mark Cappel
UpdatedFeb 23, 2009
Key Takeaways:
  • Review how an account moves to charge-off status.
  • Examine the debt collection process.
  • Understand ways you can rebuild your credit.
Please answer our four questions relating to credit card default and its consequences.

We have 4 questions about our credit card debt and its impact on our credit score:

  1. If you fail to pay your credit card bills, what are the consequences and how long will your credit score be affected?
  2. If you file for bankruptcy, are there ways to speed up the recovery of your credit score?
  3. Does it matter/help if you have one credit card for say, $100,000 or 10 credit cards with $10,000 balances, in terms of debt consolidation and consequences of not paying them?
  4. In terms of long-term consequences (credit score, ability to get credit, employment, etc), which bankruptcy hurts you the most? What about bankruptcy vs. foreclosure?

Thank you for any advice!

I answer your four questions about the consequences of defaulting on a credit card debt below.

1. Charge-Off

As with most consumer debts, failing to make payments on your credit card accounts in a timely manner will likely result in the lenders reporting late payments to the major U.S. consumer credit reporting agencies — Experian, Equifax, and TransUnion. After receiving no payment for 6-8 months, the creditors will be required to "charge off" the debts, meaning that they must remove the debt from their "accounts receivable" books; a charge-off does not mean that you are not liable for the debt, only that the creditor. Charge-offs will appear as derogatory items on your credit reports, and will likely cause a significant reduction in your credit score. To read more about credit, credit scoring, and credit reports, I encourage you to visit the at Credit Information & Resources page.


While the credit problems associated with financial hardship are an issue for consumers who are planning to make a large purchase in the near future, the more immediate consequence experienced by most consumers are the collection activities undertaken by many creditors. You will likely receive collection calls and letters from the creditor directly. If you are still unable to pay the debt after several months, the creditor is likely to refer the account to a third-party collection agency.

Third-party collectors are known to be much more aggressive in their collection tactics than original creditors, so do not be surprised if the calls become more persistent, or even threatening. Thankfully, federal law, the Fair Debt Collections Practices Act, requires third-party debt collectors to stop calling you if you send a written demand to cease communication. You can find an example cease communication demand letter at the Debt Do-it-yourself page.

Quick Tip

The Debt Coach tool can give you no-nonsense advice about your debt resolution options, including the cost and time to debt freed for each option.


In some cases, when all other collection efforts fail, a creditor will decide to file a lawsuit against a consumer for his or her unpaid credit card account. In my experience, only a small percentage of delinquent accounts end up in litigation, but it is a possibility about which you should be aware. If one of your creditors sues you, the court will likely issue a judgment in the creditor’s favor. Depending on your state’s laws regarding the enforcement of judgments, the creditor may be able to garnish your wages, levy your bank accounts, or take other action to enforce its judgment.

Most delinquent consumer debts do not result in litigation, so you should not be overly concerned, but if a creditor does file a lawsuit against you, you may need to consider establishing a repayment plan, or even filing for bankruptcy protection, to prevent further enforcement action.

2. Rebuilding Credit

If you decide to file for bankruptcy protection, the case will appear on your credit reports for ten years from the date of filing, and will likely cause significant damage to your credit rating, especially for the first few years after filing. As time passes, credit scoring models and most lenders give less weight to older derogatory items in favor of newer positive trade lines when reviewing a consumer’s credit history. You need new credit lines so you can establish positive payment history to counterbalance the negative impact of your bankruptcy filing. Establishing a positive payment history can be difficult for people who have had past credit problems, especially those forced to file for bankruptcy protection.

Consider two options. First, if you know someone with an established credit history who will co-sign a loan with you, you may be able to obtain a loan and start building your credit.

Second, if you cannot find someone to co-sign an unsecured loan, apply for a secured credit card. Secured credit cards require you to deposit cash in an account with the credit card issuer. The credit line available on the card is equal to the amount of cash on deposit. This may sound strange; why not just spend your own cash? Secured credit cards report timely payments to the credit bureaus, which helps establish a positive credit history. To read more about bankruptcy, and the alternatives available to consumers, visit the debt help page.

3. Credit Score Impact

From a credit score perspective, it is better to default on one large account than defaulting on many small accounts. Although the large account would carry a heavy weight, the many small delinquencies cause more damage than one big delinquency. But that's not the total picture. As for debt settlement programs, generally the opposite is true — the more accounts you have, the more flexibility the debt servicing company has in negotiating with your creditors. If you have only one account, if the creditor is unwilling to negotiate, the whole strategy is a bust. However, if you have multiple creditors, one or two creditors’ refusal to cooperate will not defeat the plan as a whole.

4. Bankruptcy

Both types of bankruptcy (Chapter 7 and Chapter 13), as well as foreclosure actions, are viewed as serious derogatory items on consumer credit histories. I cannot say that one is "worse" than the other, as each has its own serious consequences. However, I can tell you that a foreclosure action is often more costly for consumers; in addition, many consumers find that they must file for bankruptcy after foreclosure to prevent further collection action by their mortgage lender.

Editor's note

When we wrote this answer originally, we knew a lot less about the impact negative events have on a credit score than we do now. See the article Short Sale, Foreclosure & Your Credit Score to learn more.

If you face foreclosure and/or considering filing for bankruptcy protection, I strongly encourage you to consult with an attorney in your area to discuss your financial difficulties. Your attorney will review the details of your situation and help you decide what actions are appropriate for you and your family.

I wish you the best of luck in resolving the financial problems you are facing.

I hope this information helps you Find. Learn & Save.