What happens if I don't pay off my credit card on time?

From the added convenience of being able to pay for big ticket items on the spot, to points earning potential and even complimentary insurances - it’s no wonder Australians love their credit cards. In fact, according to RBA statistics from December 2017, there are just shy of 17 million (16,695,000) credit and charge card accounts in Australia.  

But despite the range of benefits credit cards can offer, there’s one scenario that every card holder never wants to think about: not paying their balance off in time.

Whether it’s forgetting to pay off your balance, or just not having the funds to make your repayment in full, many cardholders have probably experienced a sense of dread at having realised that the due day has passed them by.   

Those who haven’t found themselves in this situation might be wondering, what actually happens when you don’t pay off your balance on time? And any credit card holder can benefit from knowing how can you avoid getting into that situation in the first place.

First things first…

If you have been having trouble keeping up with your credit card payments, or forsee a time in the future in which that could be the case, ASIC suggests that you should get in contact with your card provider as soon as possible to let them know that you’re experiencing financial hardship.

By explaining your situation you may be able to work out a new payment plan to settle your outstanding balance, and your provider may even choose to help you out by waiving late payment fees.

How you could be hit by a late payment

If your payment is late you can rightly expect a hit to your back pocket in the way of interest charges and fees, but there are also some other immediate drawbacks you might not be aware of.    

High interest charges

I know it, you know it, we all know it. If you don’t pay your credit card balance in full by the end of the statement period, the outstanding balance is going to be charged interest - generally a sizeable amount of interest at that.

According to the Mozo database (at the time of writing), credit card interest rates range from roughly 9% on the low end up to 25% on the high end. So no matter your card, that’s cash you’re not going to want to have to fork out if you can help it.

Just to show you how quickly interest can add up, if you had an outstanding balance of $2,000 on your credit card (which has a 15% interest rate) at the end of a 31 day month you’d be charged $25 in interest alone. Plus, for every day that outstanding balance remains unpaid, you’re debt will increase thanks to the ongoing interest. 

Late fees

Aside from the interest payments (which are likely to be the biggest hit to your wallet), you could also be charged a late payment fee. Once again, the size of the fee will depend on your card, but it could range anywhere between $0 and $35.

Given that some cards don’t charge a late fee at all, if you know that you’re likely to carry a balance each month it could be worth comparing credit cards to find one with low interest rates and no late payment fees.

Interest free days

Interest free days can be one of the most convenient credit card features, generally giving you up to either 44 or 55 days to pay off your purchases before being hit with interest. But one of the standard conditions from providers is that you’re required to pay your balance off in full each month (or within your statement period) in order to be eligible to receive them.

So depending on your provider, if you do fail to pay your balance off in full not only could you lose your interest free days, you could also be required to pay your balance in full for at least two consecutive statement periods afterwards in order to be eligible to get them back again.

Rewards

For many cardholders, one of the biggest draws of owning a rewards credit card is the allure of reward points. Which is all the more reason to ensure that you pay your balance off each month - or at least make the minimum repayments. This is because some providers could freeze or cancel your reward program privileges altogether (including your points earning potential) if you fail to make the minimum repayments on your outstanding balance.   

What are the more serious impacts?

While it might feel like nothing could be worse than being hit with late fees, interest charges and potentially losing some of your credit card perks, making a late payment or not keeping up with your minimum payments could also have more serious and far reaching consequences. 

You may be issued a default notice

If you’ve missed a credit card payment greater than $150 and more than 60 days overdue, your credit card provider is likely to issue you with a default notice. The problem with receiving a default notice is that it could show up on your credit report and potentially impact your ability to access certain financial products, or be forced to pay a higher rate to access them, in the future.

According to the Victorian government's Money Help website, your lender is entitled to issue you a notice which must explain:

• How you have failed to comply with the contract
• The action you’ll be required to undertake in order to remedy the situation
• The period of time you have to remedy the situation
  

Your credit score could be impacted

Unfortunately, making a number of late payments is likely to show up on your credit report, which could in turn impact your credit score.

According to consumer credit reporting agency Equifax, since 2014 both good and bad repayment information (including that related to your credit card) can be held on your credit report. The good news it that won’t last forever, and you can take a number of active steps in order to improve your credit score.   

You may be contacted by a debt collector  

If you still can’t pay your debt even after a default notice, the next step your credit card provider could take is to employ a debt collector - either one from the provider themselves, or from a debt collection agency. If your debt reaches this point, it’s important that you’re aware of your rights and obligations, so one of the best places to start is ASIC’s comprehensive guide on dealing with debt collectors.

How to dispute your credit card debt

As mentioned above, you can always contact your provider if you’re having problems paying off your credit card debt, or if you want to dispute it. ASIC recommends that if you can’t come to an agreement with your provider, or think that the decision they’ve made is unfair, the next step to take is to ask them to review their decision.

If that fails, you can make a complaint to an independent dispute resolution scheme such as the Financial Ombudsman Service or the Credit and Investments Ombudsman.

What not to do

Sometimes things just happen in life that come in the way of being able to pay off your balance, and sometimes you can just plain old forget to pay! But if you do find yourself in credit card debt, there are a few things you certainly won’t want to do:

• Do nothing: As ASIC suggests, whether you’re experiencing financial hardship or wanting to dispute a payment, the best thing you can do is be proactive about contacting your provider - especially if you’re able reach a compromise. Don’t let the situation get worse than it needs to by doing nothing and thus potentially impacting your credit score.
• Borrow more to pay it off: You’ll need to think long and hard about the benefits and drawbacks of borrowing more to pay off your debt, with the major factor obviously being the interest rate you can secure to do it. But if you happen to have credit card debt with an interest rate on the higher side, one solution could be to look into debt consolidation loans.
• Pay off lower interest debt first: There’s no point in making payments on your car loan with an interest rate of 7% when you’re getting slugged by an 18% interest rate on your credit card. So it can often be a good idea to prioritise your loans or debt which have higher interest rates!

How to make sure it doesn’t happen again

Even if missing a payment or carrying a balance is just a one off for you, it’s always good to know about some of the options out there that could help you avoid it happening again:

• Switch to a card which is a better match: Find that you’re paying interest on your outstanding credit card balance more often than not? It may be worth comparing low interest credit cards that could reduce the amount of interest you pay if you are regularly carrying a balance.  
• Set up alerts: Many card providers are now offering alert systems which you can activate in order to be notified when your credit card payment is due. But even if your own provider doesn’t offer this service, it may be worthwhile setting up an ongoing alert or reminder each month on your phone when your statement period is coming to an end.  
• Use other ways to pay: While accumulating rewards points may be an enticing prospect, they’re almost certainly not going to be worth the cost of going into debt to accrue them. That’s why using a debit card, or even cash, may be a more sensible way to pay.    

Seek the help of a financial counsellor: If your credit card debt is beginning to get  overwhelming, it may be worth seeking the advice of a financial counsellor. A counsellor may be able to provide you with free advice to help you assess your own situation and get your budget and debt back on track.   

Where to find a low interest card

Whether you’re sick of carrying around credit card debt, or have decided to find a no frills option that would be better suited to your spending habits, there are a number of balance transfer or low interest credit cards that could make life easier.

With over 200 credit cards from 58 different providers, The Mozo credit card comparison tables could make it easy for you to find the right low interest credit card of your own, otherwise head over to our credit card guide hub for more information and handy tips.