With credit card delinquency on the rise, should we be worried? With delinquency rates on the rise, how easy is it to fall behind and how can you recover from the repercussions of a damaged credit score?
Is credit card lending hitting the buffers?
Despite figures that show Americans have access to more and better-paid job opportunities, bad debts seem to be on the rise. The American Bankers Association (ABA) reported a hike in delinquencies across a range of loan categories in 2016, including home equity loans, auto loans and credit cards. Credit card delinquency is becoming increasingly common – and, if figures from credit bureau TransUnion are to be believed, delinquency rates are predicted to rise even further in 2017. In the third quarter of last year, the 90-day-plus delinquency rate for all credit cards rose to 1.53% on average nationwide, the highest level since 2012, and due, in part to the increase in subprime lending.
How is delinquency defined?
A line of credit becomes delinquent when payments become overdue. Most credit agreements require a fixed or minimum monthly payment every month and it’s all too easy to fall into delinquency, especially when it comes to credit card debt. Miss a payment or two and you’ve broken the terms of your agreement with the lender which requires you to pay a percentage of your balance each month to stay current. It may seem harsh to accrue a bunch of additional fees or to have your line of credit throttled for being a day late and a dollar short but paying your bill on time and in full is an essential part of maintaining a good credit score.
How serious a problem is delinquency?
The amount of trouble caused to borrowers by delinquency depends, to a large extent, on how many payments the cardholder has missed. So, the day after a missed payment is due is considered one day’s delinquency but miss a second payment and you’ll find yourself looking at 30 days’ delinquency. Because it’s unlikely you’ll be reported to any major credit bureaus for missing a single payment, you do have a built-in buffer that should give you a bit of wiggle room if you genuinely forget to schedule a payment. That said, the more payments you miss, the more significant the impact on your credit score. Just a few missed payments and you could lose 100+ points, while racking up four misses will more than likely result in your account being passed into the hands of collectors, with the threat of legal action very much on the cards. And, don’t forget, your account will be suspended – or even completely revoked – pending payment.
Turning the corner
Even if you do slip into delinquency, it’s not the end of the world and there are ways to repair your reputation. Firstly, making a single minimum payment (usually around 3% of the balance) will stop the delinquency progressing any further. It’s much better to be reported for 90 days’ delinquency, say, than for 120 days. It’s important to note, though, that paying less than the minimum – even by a dollar or two – will have the same effect as paying nothing at all, so only make a payment if it’s equal to or greater than your minimum amount. The minimum payment won’t bring your account back to current status if you’ve missed a couple of payments - the ‘amount due’ should tell you what you owe. Every minimum payment you make will reduce your delinquency – if you make two payments together, one will be counted as a payment for the current month and one will cover one of your missed payments. If you can pay the total you’ve missed plus your current month’s amount, you’ll make your account current.
What happens next?
Naturally, becoming current on your account isn’t the end of the story and you’ll need to put some effort into neutralizing the effects of delinquency. Delinquency is a red flag to lenders as it shows a less-than-orderly approach to borrowing. The best thing you can do is to flood your credit report with more positive information so the delinquency becomes less obvious. It’s a good idea to open a credit card and use it prudently – either by maintaining a zero balance or by paying off your balance in full each month – so demonstrating fiscal responsibility. A secured card, backed by a savings account, can be a good option as your security deposit guarantees approval and ensures you can’t spend beyond your means. You could also see if your bank will approve you for a card or a secured line of credit based on your financial history with them. Remember that debit cards won’t help you establish credit because you’re using your own cash, not borrowing money. Store credit cards often have more lenient approval criteria and lower credit limits, so can be a smart addition to your credit recovery strategy – just make sure you pay any balances off in full.
It’ll take time and diligence to recover from a delinquency. The most important action is to tackle the debt and bring your account back into credit before working to erase the effects of the delinquency on your credit record. You’ll need to recapture the trust of your lenders by showing how responsible you can be with your finances and that you’re capable of handling credit without sliding into arrears. It’s a good time to take stock of your finances and make sure you’re not over-stretching your resources. When you’re back in control, you can start looking to the future.