If you've found yourself recently falling behind on bills, or have suffered a medical issue or employment setback that has left you with additional expenses, you may be facing the tough decision of whether to miss a credit card payment (or make only the minimum payment) or skip payment on a medical bill or installment loan. The consequences of this choice can vary widely. Read on to learn more about how these types of debt are treated under law and what else you should consider before you miss a payment.
What are the differences between credit card debt and other types of debt?
One thing that makes credit cards unique, as compared to other types of debt, is the fluctuating monthly payment. Installment loans, such as auto, home, or personal loans, are amortized over the period of the loan and a fixed monthly amount is paid until the debt is fully paid off. These loans generally have a fixed interest rate, or (in the case of adjustable-rate mortgages) provide you with plenty of notice before an interest rate increase.
Credit cards are a type of revolving loan -- the entire loan amount (e.g. what you charged in a specific time period) is due shortly after the reporting period closes. These cards may also periodically raise or lower the interest rates at a more frequent interval than installment loans. In general, because credit cards are unsecured debt (as compared to home mortgages or auto loans that have some sort of collateral in exchange for the funds) they charge higher interest rates than secured loans or installment loans.
What can you do if you have trouble making your monthly credit card payments?
The moment when you don't have enough cash to pay off the credit card bill when it comes due can be a sobering one. However, nearly all credit cards offer a minimum payment option if you can't afford to pay the full statement balance. This minimum payment is calculated based on the total balance owed and your interest rate, but is generally much more affordable than the full payment.
Most credit cards also have flexible payment dates. Although the reporting period is fixed based on the date the account was opened, the actual payment for the statement balance need not be paid at this time, and payment can generally be set out up to a full statement period. By moving your payment due date, you can structure your monthly bills so that they correspond to the dates you're paid and allow you a little more breathing room.
Your first steps upon falling behind on your credit card payments should be investigating these two options. In some cases, you may be able to reorganize your payment schedule and pay less than the full payment, allowing you to still maintain "current" status on all bills. Although your remaining credit card balance will continue to accrue interest until it is fully paid, you won't need to miss any payments.
What if you have trouble making your monthly installment loan payments?
If you instead are worried about your ability to pay an installment loan, such as a mortgage or auto loan, your best bet is to contact the lender proactively and see what options are available to you. Because the costs of default are high (both for you and the lender, who must pursue legal action to recover their funds), many lenders are willing to work with you and offer a temporary forbearance or due date change until you're able to resume normal payments.
What happens when you miss a payment?
The consequences of missing a payment -- either a credit card minimum or an installment loan -- can be dire. After a brief time period has passed, the credit card company or other lender will report this default to the credit reporting agencies, causing your credit score to plummet. In response, many lenders will cut your revolving credit limits (including home equity lines of credit and credit cards), giving you less money at your disposal.
If you find yourself close to missing a payment, don't delay -- contact your lender to investigate your options.