Credit card defaults are often associated with late payments, but these two things are definitely not one and the same. In fact, a credit card default or “payment default” for any kind of account can only occur when you have more than $100 outstanding for more than 60 days.
The reasons for ending up in this situation are varied but Senior Executive at ASIC’s MoneySmart, Robert Drake, said there are a number of reasons this kind of situation can arise.
“Debt can get out of control for some people because they stick their head in the sand and avoid paying attention to it. For many others, it’s due to circumstances beyond their control or a change in personal circumstances like illness, a family breakdown or losing your job,” he said.
“The other issue is multiple debts can lead to deeper debt and many people struggle to work out the best way to consolidate and eliminate.”
The New South Wales Consumer Credit Legal Centre (NSW CCLC) also outlines that a credit card default, and financial hardship in general, could also happen when “you could not afford to repay the loan when it was originally obtained.”
While credit card applications tend to screen out people who may not be able to afford a certain card or credit limit, if you feel that this scenario applies to you the NSW CCLC says you should “get legal advice immediately”.
Default reasons aside; if you are this far behind on payments it is important to look at how it can affect you in the short and long term.
Firstly, it will be an issue for your actual credit card account. There may be late payment fees to deal with as well as the initial debt and interest charges.
MoneySmart’s Drake adds that the impact defaulting has can also vary depending on individual circumstances.
“You might receive a court order for bankruptcy, your wages and even your assets can be used to pay the debt. Your credit rating will also take a hit, which means lenders will be less likely to loan you credit for future investments.”
Credit reporting agency Veda Advantage also explains that once a payment default is listed on your credit history it will stay there for five years, even when you have paid the overdue amount.
“The fact that an account has become overdue and then been paid becomes part of your credit history.”
Veda Advantage said the best solution is to avoid ever defaulting on an account, but at least the resolution will also be noted on your account if it ever gets to this stage.
While the implications of defaulting are serious, there are many opportunities to resolve financial hardships that you face.
Credit card issuers and other lenders will typically try to get in touch with you once your have missed one credit card repayment, and Drake said it is important to be proactive about resolving the issue.
“The earlier you make a plan to pay off your debts, the better. If you’re getting to it late, don’t panic. In most cases, the lender will be keen to work with you to make a plan to pay off your debt within what you can afford,” he said.
“Financial hardship rules apply, which means the lender is obliged to look at changing repayments to what you can afford. Contact your lender and talk to them and work with a financial counsellor to make a plan to pay off your debt.”
Some lenders even offer dedicated support services to help you get back on track. Westpac, for example, has a dedicated service for customers facing financial difficulty.
The Westpac Assist service offers professional consultation, tailored resolutions and connection with a free Financial Counselling service if necessary.
“Even with the best planning, there are many reasons why financial difficulties can arise. Sickness, injury, job loss or relationship breakdown can all play a part,” the Westpac website explains.
“At Westpac, we encourage customers facing financial difficulty to talk to us as soon as the situation arises. Our team at Westpac Assist will take the time to understand your situation, and provide you with personal assistance to manage your Westpac accounts.”
Other issuers have similar support services and resources designed to make dealing with credit card debt and financial hardship less stressful.
Similarly, the MoneySmart website has a range of resources that could help you deal with debt, like the Credit, Loans & Debt ebook, credit card calculator and budget planner.
MoneySmart also has information about where you can go for help, including registered support services and information about debt consolidation – whether you approach it on your own or through a registered support service.
Defaulting on your credit card account brings with it a range of complications but there are ways to resolve any issues that you face.
Now that you are aware of the issues that lead to defaults, the implications and the solutions, it should be easier to stay on track with your finances no matter what the future brings.