How Credit Card Delinquency Works

Despite the fact that credit card delinquency has become increasingly commonplace over the past few years, many people's understanding of it remains quite basic. Such a dearth of knowledge perhaps explains why delinquency has become such a significant problem and why those designated as delinquent do not know how to resolve this personal finance predicament. This is unfortunate, however, because once one garners a more thorough understanding of delinquency, dealing with it is actually quite straightforward. (For related reading, check out Breaking Down Credit Card Fine Print.)

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What is credit card delinquency?
A credit card holder becomes delinquent when he or she falls behind on credit card payments. When using a credit card, you must pay a certain fraction of your balance each month in order to stay current on your account. By giving you a line of credit, an issuer is basically providing you with a loan that you must pay down little-by-little each month. Not making the required monthly minimum payments is essentially breaking the terms of your agreement with the lender. Unfortunately, this results in escalating repercussions for the card holder.

Delinquency is divided into levels which are indicative of how many payments the card holder has missed. These levels are often referred to in terms of days. For example, the day after you miss your first payment, you are one day delinquent. After you miss your second payment, you are 30 days delinquent and so on.

Technically, a consumer becomes delinquent after missing a single monthly payment. However, delinquency is not generally reported to the major credit bureaus until two consecutive payments have been missed. Consumers are thus provided a buffer zone and are allowed one misstep without suffering significant repercussions. (Find out what information the credit bureau has about your payment history in How To Check Your Credit Report.)

Effects of Delinquency
Make no mistake about it though, a fool-me-twice-shame-on-you type of principle is in effect because being reported to the credit bureaus as delinquent will have a negative impact on your credit score. While the damage might be relatively minimal after only two missed payments, your credit score may fall as much as 125 points after three. Once four payments have been missed, the impact on your credit score will become even more severe and your account will likely be turned over to collections. The efforts of collectors will surely ramp up after five missed payments and the possibility of legal action will likely be in play.

In addition to suffering credit score damage and being the subject of collection efforts, a delinquent consumer's charging privileges will either be suspended pending payment or revoked permanently, meaning that full payment will mark account closure. While these punishments might seem severe, consider the situation further. Someone who reaches this level of delinquency did not pay his or her credit card bills for five months. A credit card is not a magic piece of plastic that allows for free purchasing, and such behavior will not be tolerated by any credit card company. (For more information on your credit score, see 5 Keys To Unlocking A Better Credit Score.)

Getting Out of Delinquency
Still, just as there is a way to get into delinquency, there is a way to stop and ultimately escape it. Making one minimum payment stops the progression of delinquency and keeps you at your current delinquency level. This is essential to understand because getting reported to the credit bureaus as being 120 days delinquent is far worse than being reported as 90 days delinquent. Thus, if you can pay at least the amount of one minimum payment (generally around 3% of your balance), you should do so.

This, however, is where consumer after consumer gets into trouble, making the same two mistakes over and over again. Fortunately, they are not hard to avoid when you know to watch out for them.

Mistake No.1: Paying Less Than the Minimum
Interestingly, payments less than the minimum have no effect on delinquency, almost as if no payment at all was made. Thus, when people pay a little bit thinking that it will surely improve their situation, it provides no benefit at all. This trap can be easily avoided though as long as you only make credit card payments greater than or equal to the minimum amount required.

Mistake No.2: Paying ONLY the Minimum Payment
Many people confuse the minimum payment required with the total amount due that appears on their bills. The amount due is the total figure that you must pay in order to become current and is likely comprised of multiple minimum payments, so don't refrain from making payments until you have paid the full amount required to bring your account current.

For example, while making one minimum payment keeps delinquency from worsening, making two decreases delinquency. For instance, if you are 90 days delinquent, paying the amount equal to two minimum payments will bring you to 60 days. One minimum will count toward what you owe for the current month and the other will cover one of the payments that you missed. In order to get out of delinquency completely and become current on your account, you must pay the total of your missed minimum payments plus the current month's minimum.

Dealing With Delinquency's Aftermath
Once you become current on your bill, you will need to get to work reversing the effects of delinquency. Delinquency is like a black eye on your credit reports because it signals consumer irresponsibility. However, the more you cover it up with positive usage information, the less glaring it becomes.

The best way to infuse positive information into your credit reports is to open a credit card because information about credit card usage is reported to the credit bureaus on a monthly basis. Whether you make purchases and pay for them in full or simply maintain an open card at a zero balance, a credit card will provide you ample opportunity to demonstrate fiscal responsibility.

Secured credit cards are particularly apt for credit improvement for this because you must place a refundable security deposit in order to open one. This security deposit makes approval guaranteed, provides your issuer protection against default and erases the need for an expensive fee structure. Additionally, since it's also your credit line, the security deposit ensures that you cannot spend beyond your means. (Get more tips in How To Establish A Credit History.)

The Bottom Line
Ultimately, you will not recover from the effects of delinquency overnight. This will take both time and consistently responsible credit card use. Remember to use your money in the most efficient way possible by not making payments below the minimum and understanding the difference between this amount and the total amount due. Once out of delinquency, you must dilute the negative information it brought to your major credit reports and re-earn the trust of lenders by illustrating to them that you can handle credit without getting into trouble. So be patient, open a secured credit card, use it wisely and you will eventually regain your previous stature. In the end, delinquency won't seem so intimidating after all.

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