Making peace with your credit card debt

Have credit card bills you don’t want to pay every month? Here are some ways to lessen the burden and what happens when you don’t pay off credit card debt.

Credit card debt is the subject of perennial moral panic in personal finance. U.S. household credit card balances have been rising steadily since we began recovering from the Great Recession, with a brief dip in the first year of the COVID-19 pandemic.

As of March 2022, total credit card debt in the U.S. was $887 billion. The average credit card balance for households that carry debt has hung out around $6,000 for several years.

If you wanted to pay off that amount in the next year, it’d come with a monthly bill of around $600. That’s a huge chunk of resources for a lot of people. So what if you don’t want to pay it off?

Let’s talk about what happens when you don’t pay your credit card bills — and how to decide for yourself the best ways to deal with your debt.

Why everyone says you have to pay off credit card debt

As debt goes, credit card balances are some of the nastiest kind, because:

• Credit card interest rates tend to be higher than most loans or lines of credit. That means it costs you more money to carry a balance on credit cards than to hold almost any other kind of debt.

• Credit card debt compounds fast. It’s usually calculated monthly based on an average daily balance, so each day you carry a balance counts against you.

• Credit card debt is hard to get rid of. Card agreements don’t usually come with relief options, like deferment, that you get with student loans.

• Credit card debt doesn’t build you equity — that’s a finance-y way of saying “ownership.” Taking on a mortgage, for example, lets you own a home, an asset you could leverage to increase your wealth. Credit card purchases don’t usually move your financial situation forward like that.

• Credit card debt is easily reborn. When you pay down a balance, that amount is freed up to spend again, bringing your balance right back to where it was.

People often talk about credit card debt as the result of frivolous overspending and, therefore, a bad financial decision you need to remedy as soon as possible with the resources you obviously have access to.

But that’s not how most people use credit cards.

In a recent poll by CreditCards.com and YouGov, nearly three-quarters of respondents had accumulated credit card debt because of day-to-day expenses, medical emergencies, or unexpected expenses like home or car repair. 11% cited “retail purchases like clothing or electronics” (both necessities if you want to live and work among humans). Another 11% cited vacation or entertainment. Those last two, by the way, are not frivolous; budget culture just tends to label them as such when poor people buy them.

Credit card balances are categorized as consumer debt, a type of debt used to buy things for personal or household use. That makes it tempting to attribute them to overconsumption and prescribe the solution of paying them off and consuming less to avoid accumulating more debt in the future.

Proponents of debt payoff also cite basic individual responsibility: You signed an agreement and borrowed the money; you have to pay it back. That feels reasonable until you layer in realities like:

• Wealth and income gaps that increase some people’s need for credit.

• Legal discrimination in credit scoring that taxes marginalized people with higher interest rates.

• Predatory marketing and promotions that distract borrowers from the risks of the agreement.

• An entire business model that incentivizes credit card companies to encourage you to carry a balance that costs you money.

• A system of scoring, interest, fees, billing dates, minimum payments and compounding that’s intentionally more complex than most people have the time to unravel.

The notion of individual responsibility assumes you’re entering a credit card agreement in good faith, and it’s easy to argue that any decent person should do that. But the credit card companies are not entering these agreements in good faith. They’re designing a product that depends on you being what financial experts label as “irresponsible” and ensures they get exponentially more than they give.

Reasons to not pay your credit card debt

If you have credit card debt, maybe you’re not paying it off — or don’t want to pay it off — because you have other ways to use your money.

When you approach debt as morally neutral, deciding how to deal with it is a matter of costs, benefits and priorities. Debt payoff doesn’t have to jump to the forefront of your financial strategy if you strip it of the shame and blame piled on by budget culture.

There’s an important fact about debt that most payoff-focused strategies ignore: When you use your money to make a debt payment, you get nothing in return. The money is simply no longer in your pocket. When you use your money on almost any other kind of transaction, you walk away with something of value.

Deciding how to deal with debt isn’t just about choosing the easiest or most practical payoff strategy. That step is way down the road.

The first step in deciding how to deal with debt is weighing the consequences of carrying debt against the other ways you could use your money.

You might not pay off credit card debt because you’re building savings for future big spending, like making a home down payment or getting life-saving surgery not covered by health insurance.

You might not pay off credit card debt because you’re spending the money on other things, like higher rent to live in an identity-affirming city, buying nutritious food for your family or leasing a laptop that lets you do your job from home.

You might use your money for just about anything that improves your quality of life more than having less debt would do.

That actually feels more reasonable than eliminating debt at all costs, doesn’t it?

What happens if you don’t pay off credit card debt?

Knowing the consequences of carrying any kind of debt is key in deciding how to deal with that debt. You have to know what happens if you don’t pay off credit card debt so you can weigh that outcome against the consequences of not using your money some other way.

Credit card debt is a particularly complex beast, because it’s a revolving debt. That means you only borrow money as you need it, and credit becomes available to you again as you pay off the balance.

Credit cards are further complicated by their typical repayment structure. When you get a bill, the payment due by the due date isn’t the total amount you’ve borrowed; it’s a minimum payment that’s usually around 2% to 3% of that. So there are two ways people carry credit card debt: You might make your minimum payment with every monthly bill but carry the rest of the balance month to month, or you might not make a payment at all.

Either way, as long as you’re paying off less than the full amount you spend each month, you’re “carrying a balance” — i.e. holding credit card debt that accrues interest.

If you make just minimum payments

Making minimum payments is enough to keep you in good standing with your credit card agreement, but it leaves the rest of your balance to grow with interest and is a slow way to eliminate credit card debt.

When you get a credit card bill (called a “statement”), it’ll include a slew of information, including both a statement balance and a minimum payment amount with a payment due date.

The statement balance is the total amount of your credit card debt as of the date the statement was created. That includes any balance you were carrying plus any purchases you made in the last billing cycle (about one month). The minimum payment is usually about 2% to 3% of that amount; that ratio is set in your credit card agreement, and the percentage will be the same every month.

You’ll accrue interest

If you make just the minimum payment by the due date, you’ll avoid a late fee and a ding to your credit report; and your remaining balance will be charged interest, which is tacked onto the balance.

Average credit card interest is a little over 16% APR, though the average for folks who carry a balance is 18.5%, as reported by the Federal Reserve. There’s no maximum allowed interest rate, but a typical credit card interest rate runs between 16% and 35%. Your original interest rate was listed in your credit card agreement, and the issuer can change your terms anytime with 45 days’ notice.

It’ll affect your credit score

Making just minimum payments and carrying a balance on your credit card can also affect your credit score, because credit card companies typically report your debt and payment activity to credit bureaus.

Carrying a balance on your credit card could mean:

• High credit utilization — that’s the amount of your credit limit you’ve spent. If you have a $1,000 credit limit and have spent $300 that’s not repaid yet, your credit utilization ratio is 30%. That ratio figures heavily into your credit score, and most experts say utilization over 30% across all your cards can bring your score down.

• High overall debt, which includes the balances you carry on debt from all sources and can also affect your credit score.

• High debt-to-income ratio — that’s the difference between the debt payments you owe each month and how much income you earn. It doesn’t hit your credit score directly but figures heavily into qualifying for a mortgage.

You’ll run out of credit

If you continue to use your credit card and don’t repay the balance, you’ll hit your credit limit and not be able to spend on the card anymore. You could open additional cards, but eventually that resource might run out, too, as your high debt brings your credit score down.

If you don’t make any payments

If you ignore your credit card bills altogether and make no payments or less than the minimum payment by the due date, you’ll be assessed late fees in addition to the accrued interest and effect on your credit report.

Your credit card agreement might also include a penalty interest rate, which is a higher interest rate charged to your balance for around six to 12 months if your payments are late.

All of those costs are added to your existing balance, so the TL;DR is: When you don’t make credit card payments, the amount of debt you owe increases.

Debt collectors could acquire your debt

If you ignore your credit card bills long enough that a creditor figures it’s not worth dealing with your account anymore — usually around two to three months — it’ll often sell the debt to a debt buyer, a company that’s legally authorized to acquire and collect on accounts.

A debt buyer pays the credit card company a tiny portion of your balance — around 4 to 6 cents per dollar. Then you owe repayment for the original balance to that company instead of the original creditor.

Debt collectors usually report this action to credit bureaus, so going to collections is another hit to your credit score. They’ll also use all the tactics legally (and often illegally) available to them to contact you and intimidate you into making payments.

You could get sued

Either credit card companies or debt collectors could sue you for delinquent payments. It’s rare for credit card issuers themselves to sue; they’ll probably sell your debt to a debt buyer before they’ll put resources into a lawsuit.

Debt buyers are more likely to sue for non-payment, but will still exhaust other options first. Legal action is costly, so they’ll want to avoid it if they think they’ll be able to collect payment any other way.

The statute of limitations to sue for a debt varies by state between three and 10 years. About 15% of people contacted by a debt collector have been sued for the debt, according to a 2017 report from the CFPB.

Wage garnishment

Neither a credit card company nor a debt collector has the ability to garnish your wages (take money directly out of your paycheck) without a court order. They could, however, win that right through a lawsuit if they don’t get you to settle on a payment plan.

Wage garnishment from all sources can legally be up to 20% of your pay; the amount depends on your financial circumstances (but, FYI, it probably won’t feel reasonable on your end).

A court order could also give a debtor the right to collect on your personal property or take money right out of your bank account if the judge deems it fair.

4 ways to lessen the burden of credit card debt

Consider these options if you’re fed up or feeling underwater with credit card payments.

1. Make just the minimum payments

Making minimum payments by their due dates is a way to minimize the burden you take on as you deal with credit card debt without severely impacting your creditworthiness.

Minimum payments usually aren’t enough to make a dent in your balance, so this strategy isn’t a way to eliminate credit card debt. It’ll just keep you from accruing fees and going to collections.

Credit card companies are required to include on your bill how long it would take you to repay your balance if you make minimum payments, so you can use that information to make your decision each month. You can use a debt calculator, like this one from Credit Karma, to see a debt payoff timeline with different monthly payment amounts.

2. Pay credit card bills with more favorable debt

Eliminating credit card debt using funds you acquire through another kind of debt could quickly lower the interest rate and/or monthly payment you’re committed to. Depending on the loan you use, you could even find it a lot easier to avoid repaying in the long term.

• Federal student loans: Enrolled students might receive a student loan refund after tuition is paid each semester. When I was a student, I got between $3,000 and $4,000 each semester and once used it to pay off half of my credit card balance. A federal student loan has a significantly lower interest rate and comes with tons of relief options you can’t get on credit card debt.

• Personal loan (debt consolidation or refinancing): A credit card debt consolidation loan or refinancing loan is a type of personal loan that pays off all of your credit card balances with a lump sum. Then you owe money to a single lender in monthly installments, usually at a lower interest rate and maybe a lower monthly payment. This kind of debt is hard to ignore, but it can offer significant relief compared with credit card balances, especially if you’re juggling a lot of them.

• Home equity: Homeowners can take out a home equity loan or line of credit (HELOC) to pay for a variety of things. They usually have a lower interest rate than credit cards and maybe even a personal loan. But — and this is a big but — this debt is secured by your home. Not repaying it can mean losing your property, which isn’t the case with credit cards. If your financial circumstances are secure enough that this doesn’t concern you, you’d likely qualify for an unsecured personal loan and be able to avoid putting your home on the line.

3. Let it go to collections

Don’t want to give the credit card company any of your money? You could ignore your bills and skip payments altogether, and your debt will most likely make its way to collections after a few months.

If you want to get collectors off your back quickly and don’t mind making some payment, you could negotiate an agreement to eliminate the debt with a lower lump sum or payment plan. The agency probably paid at most 6% to acquire your debt, so it has a lot of wiggle room to accept a lower offer from you and still come out ahead.

Or, ignore the debt collector as well.

A debt will drop off of your credit report after seven years as long as you don’t make any payments, and the collector will lose the right to sue you for payment in three to 10 years, depending on your state.

You can’t know whether a debt collector will think it’s worth its resources to sue you, so ignoring them comes with risk. They’ll have to weigh their ability to locate you, your ability to pay and the amount of debt. 

This is not individualized legal advice, and I’m not an attorney, but here are a few things to consider:

• To bring a lawsuit, a collector has to provide your accurate, current home or work address, because you have to be properly served the summons to appear in court.

• Attorney fees and court costs might not be worth it for them to collect a small debt. What constitutes “too small” is relative and depends on the collection agency.

• An agency isn’t likely to sue you if it believes you still won’t be able to pay. Even with court orders, if you don’t have the resources, the agency can’t get enough money from you to justify the cost of a lawsuit.

To extrapolate: You might be at higher risk of being sued for non-payment if you live at one address for several years, work as an employee or earn a livable income.

4. File bankruptcy

Bankruptcy is wildly misunderstood and highly shamed in our culture. It’s neither the get-out-of-jail-free card many people believe it to be nor the burden on innocent financial companies opponents paint it as.

Bankruptcy’s purpose is to get you out of debt payments that are too burdensome in your life — but it can be a fairly burdensome process itself. It’s nearly impossible to file without hiring a lawyer, who might charge hundreds or thousands of dollars, and the process takes about three to six months.

Bankruptcy is a legal way to discharge debts either by paying off all or some of them with assets you own; or by setting up a payment plan through a government trustee. If you have to sell assets, that’ll include anything of value you own that a judge deems not necessary to live and work — like a savings account, ATV or collectibles. Your home, car and retirement account are usually safe (but those details vary by state and circuit court district).

Experts tend to recommend bankruptcy as a last resort, not least because it can severely impact your future finances.

Unsurprisingly, lenders and credit card companies don’t want to extend debt to someone who’s legally declared they’re unable to repay debt. Bankruptcy stays on your credit report for 10 years, so it could affect your ability to buy or rent a home or take out loans or credit cards in the meantime.

Keep in mind, though, that bankruptcy typically has about the same effect on your credit score as a poor payment history — so, if you’re going to stop making payments on your debt anyway, bankruptcy might not have such a downside. A bankruptcy lawyer or financial planner can help you figure out the effect a case might have on your particular circumstances.

Make peace with your debt

Whatever you choose to do next with your money is the right choice.

People love to demonize credit card debt and the purchases that rack it up — but this type of debt and spending are just as neutral as any other. It’s appalling that credit card companies have such strong rights to collect on debts and charge what they do in a society where we don’t guarantee humans a right to housing, food or health care.

Deal with your debt in whatever ways make you feel at peace and secure in your life.

If you feel shame around your debt, that’s not because you’ve done something wrong. That’s the voice of internalized budget culture telling you it knows better than you what you should do (or should have done) with your money, and that can never be true.

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