Credit Card Delinquency: Is America Facing a Crisis of Past-Due Debt?

During the onset of the pandemic, many witnessed record-high unemployment rates and pay cuts. In April 2020, unemployment rates rose to 14.8%, compared to 3.7% in 2019.

This left many uneasy about how they’d keep their heads above water and stay on top of debt payments. You might expect to see a rise in credit card delinquencies because of sudden changes in cash flow and the economic climate, but the opposite happened. Credit cards saw the second greatest decline in delinquency rates, behind mortgages.

Some attribute this downward trend to stimulus relief, a lack of spending, and restrictions on entertainment and travel, and deferment and forgiveness programs by creditors. If this is true, could credit card debt be a ticking time bomb set to explode once restrictions ease and relief programs stop?

What is credit card delinquency?

Credit card delinquency happens when you don’t make the minimum required payment on your credit card by the due date. Delinquent credit card debt is just a fancy name for past-due debt or overdue debt. It basically means that you’re behind and you need to catch up.

How credit card delinquency works

The impact of past-due credit card debt gets worse the longer the balance remains delinquent. A balance that’s only a few days overdue will only have a minimal impact on your finances in the form of late fees. But a balance left unpaid for more than 30 days will start to affect your credit.

Here’s how it works:

1.If you don’t pay the required minimum payment by the billing due date, your credit card is considered past-due. The credit card company will immediately apply late fees.

• The maximum late fee, if you’ve never missed a payment before, is $25.
•  If you’ve missed a payment within the past six months, the late fee can be up to $35.

2. Once your bill is more than 30 days late, it’s considered a missed payment. Now you are 30 days delinquent.

•  By law, the creditor can now report the credit card delinquency to the credit bureaus. However, most credit card companies will not report the delinquency until you have missed the payment by 60 days.

3. Things get worse once your balance is more than 60 days delinquent. If you haven’t made a payment in 2 months, two things will happen:

• The credit card company will report the delinquent account to the credit bureaus, the missed payments will show up in the credit history section of the account on your credit report.
• The creditor will also start to apply penalty APR. These rates are much higher than your standard interest rate.   Penalty interest rates average 29.99%.

4. Once the credit card company starts reporting delinquent payments to the credit bureaus, you must catch up and bring your account current to fix your credit history.

5. If you continue to miss your payments, you have nine months where the account will remain delinquent. After nine months, the creditor will charge off your account. The account will be frozen and sent to either an in-house collections department, or it will be sold to a third-party debt collector.

Credit card delinquency rates 2021

The Federal Reserve Economic Data (FRED) gives us a visual representation of credit card delinquency rates over the past two decades. We can see rates have been at historic lows during the pandemic.

A Transunion Industry Insights Report also corroborates these findings, stating that in last quarter of 2020 (Oct-Dec), the credit card delinquency rate (for payments over 90 days late) was 1.29% compared to a rate of 2.18% in last quarter of 2019.

Typically, once an account has become delinquent for more than nine months, your account could be sold to debt collectors. However, George Simons of SoloSuit tells us in 2020, debt collection cases were at record lows in Los Angeles county.

“Los Angeles, California saw its lowest month on record for debt collection cases in 20 years in May 2020. Courts were partially closed in the county, resulting in lower than normal caseloads, and in May 2020, 1,575 people were sued for a debt in LA, down from 10,615 in Jan 2020.”
EXPERT: George Simons, CEO and Co-founder of SoloSuit

“Los Angeles, California saw its lowest month on record for debt collection cases in 20 years in May 2020. Courts were partially closed in the county, resulting in lower than normal caseloads, and in May 2020, 1,575 people were sued for a debt in LA, down from 10,615 in Jan 2020.”

In addition to lower delinquency and debt collection rates, borrower debt is also comparably lower. Rates went from $927 billion in fourth quarter of 2019 to $819 billion in the fourth quarter of 2020.

One reason for such low delinquency rates could be the three robust stimulus payments Americans received. Data shows many Americans chose to use some of their money to pay down debt. Jill Gonzalez of Wallet Hub shares her perspective saying,

“According to a recent WalletHub credit card debt study, Americans excelled in 2020 in terms of paying off credit card debt. We collectively got rid of almost $83 billion in debt, which is a record amount. To put things in perspective, consumers have been adding about $54 billion in credit card debt on average per year in the past ten years. This payoff and the drop in credit card delinquencies are likely a result of credit card companies being more lenient during the pandemic, and of the COVID-19 stimulus payments.”

Gonzalez mentions credit card issuers being more lenient during the pandemic which could further explain low delinquency rates. Thanks to the CARES Act, many providers deferred payments and waived late fees, thus reducing pressure on consumers.

“Based on a survey conducted by WalletHub regarding late payments, 60% of Americans say their credit card company has been helpful during the pandemic, and almost 9 in 10 people who have tried to get a credit card late fee waived were successful.”EXPERT: Jill Gonzalez, Financial Literacy Advocate and Communications Director at WalletHub

It’s also possible people are choosing to spend cautiously. A nationwide survey conducted by Debt.com of over 1,000 respondents found people have used credit cards less during the pandemic. Additionally, travel restrictions and stay-at-home orders meant Americans couldn’t spend as much on entertainment and leisure.

Digging out of the credit hole caused by delinquent credit card bills

Although creditors offer some leniency when you’re late initially, once they start reporting credit card delinquency to the credit bureaus, you end up in a hole. And digging out of that hole can be tough, especially when your finances are already distressed.

To stop past-due credit card debt from appearing as negative information on your credit history, you must pay the full delinquent amount to bring your account current. In other words, once you’re behind your credit history will stay behind until you catch up. Even if you make a payment, it won’t show that you did in your credit history. It will still show as delinquent.

This can have a huge negative impact on your credit score. Every month where the payment is listed as delinquent will ding your score. So, month after month, your credit score will take damage until you catch up.

How to pay off delinquent credit card debt

If the financial hardship you faced was only temporary, then you need to make catchup payments. This involves paying as much of the delinquent balance on the line of credit as quickly as possible.

For example, if your account became past due because you lost your job, once you get a new job you need to dedicate as much money as you can to bring your account current.

If the financial hardship you’re facing is more long-term or caused by budget issues, then you may need to take more aggressive measures to catch up with your credit card bills. The first thing you should do is call a nonprofit consumer credit counseling agency. This is a free service that can help you identify the best way to get out of debt for your unique financial situation. You will have three primary opinions.

Debt management program

If you fall behind on payments, you typically need to pay all of the money you owe before your account becomes current on your credit report. A debt management program fast tracks that process. Most creditors will agree to bring the account status current after only three payments on the program. This means a debt management program can get you out of debt faster and ensure less damage to your credit score.

If you only have a few delinquent credit card accounts, but the rest are current, the credit counselor will usually recommend this option. A debt management program is essentially a professionally assisted debt consolidation plan that repays your debt faster than you can with minimum payments.

Debt settlement program

If you have a lot of accounts that are behind and even some that are already charged off, then you may be better off with a debt settlement program. This focuses on getting you out of debt for a percentage of what you owe.

Past due accounts continue damaging your score, so the faster you bring them up to speed, the better. Settling collections could free up cash to bring your past-due accounts current. Or you may decide to settle everything to get out of debt quickly, so you can focus fully on rebuilding once you’re out of debt.

Pre-bankruptcy counseling

The credit counselor will also discuss bankruptcy if you’re facing severe financial hardship. They may recommend pre-bankruptcy counseling.

If you need help managing your delinquent credit card debt, you can get it today. Reach out for a free consultation and personalized plan for managing your debt.

Post-pandemic predictions

Although delinquency rates are still low, how long will this trend last? According to expert predictions, not long. Here are a few outcomes our experts forecast.

Spike in delinquency rates

Experts predict that post-pandemic delinquency rates will spike once the dust settles.

Gonzales states, “As the economy reopens from the coronavirus pandemic, it’s likely that credit card delinquencies will rise again, as will the amount of credit card debt collectively owed and the average household balance.WalletHub’s early projection for credit card debt in 2021 is that U.S. consumers will add roughly $50 billion to their total balance, which will inevitably come with a higher delinquency rate.”

Dr. Guy Baker, founder of Wealth Teams Alliance, also agrees that we’re likely to see a rise in consumer debt as the economy reopens. It’s possible that the cost of living will go up, resulting in a domino effect on savings and debt.

“Consumer spending and debt are a tenuous brother to the economic expansion of the country. To the extent the economy is contracting, expect debt to rise, savings to fall, and prices to rise. Unless the economic activity keeps pace, many consumers will be caught between lagging compensation, rising prices, and the need to fulfill their spending demands.”EXPERT: Dr. Guy Baker, Wealth Advisor and Founder of Wealth Teams Alliance

Rise in credit card judgments

Courts have been closed due to the pandemic and likewise, credit card providers have deferred payments. Once this lifts, we could see an increase in people being sued for overdue credit card debt.

Simons predicts, “We’ll soon see case numbers similar to those after the bubble popped in 2008: 14,000 debt lawsuits in LA county a month.”

If you end up with a default judgment, there are still options. You could try to negotiate a settlement with your credit card issuer, but you may have to fork out a lump sum. However, paying off collections is better than ignoring it and watching your score continue to drop. You can also challenge the judgment and have it overturned if you find errors, such as being sued for expired debt.

Return to pre-pandemic spending habits

Some people cut back on spending because of the economic uncertainty, but experts aren’t convinced these changes are permanent. Gonzalez provides insight stating, “Considering that over 47 million Americans expect to miss a credit card due date in 2021, it would seem that people might not significantly change their financial habits in the near future. Plus, the lessons learned during this pandemic could be soon forgotten, which is what we witnessed after the Great Recession.”

You can avoid missing payments and slipping into unhealthy financial habits by organizing your finances. Now that the government is rolling out vaccines, and the economy is picking up, it’s a good time to enact a plan to pay down credit card balances.

Credit Analyst, Nathan Grant expands on this:

“If you’ve been able to take advantage of deferments or forbearance for any existing debts, prepare your budgets for upcoming changes once you have to make additional payments each month towards those debts that were delayed due to the pandemic.

A good way to get ahead is to budget for paying beyond just the minimum amounts due each month, especially on credit cards, which generally have higher interest rates.”EXPERT: Nathan Grant, Senior Credit Analyst