Implications of non-repayment for credit cards
When you have an open credit card account, you will be required to make a minimum monthly repayment to pay off what you have borrowed. You can decide to pay a minimum, full payment or everything in between but delaying repayment will add to your total outstanding balance.
Your monthly repayment is available in the form of a statement and can be viewed on the online portal of your credit card provider or as a letter in the post. Repayments are set up via a direct debit to ensure that the collections are handled smoothly and to avoid the account from going into arrears.
We understand that circumstances can change which mean that you may not be able to keep up with your credit card repayments. Such circumstances include changes in employment, an emergency expense or being paid late by your employer. However, if you have not yet taken out a credit card or are thinking about applying for a new one, it is important to understand the various consequences and risks if you miss repayment as highlighted below:
Extra fees will be applicable
As soon as you miss repayment, you will be required to pay the interest rate on your card (usually 15-20%) plus a flat fee of around £12. Credit card companies make most of their profits by customers making late repayments so it is advisable to plan how you intend to repay before making purchases on your credit card.
If you recently received a new credit card or have been eligible for 0% interest, this means that you won’t have to pay any further interest if you miss repayment. However, 0% interest cards usually come with an introductory period (typically around 12 months) and once this expires, you will be charged an interest rate that is above average.
Failing to repay on time will impact your credit rating
If you miss your monthly credit card repayment, it will negatively impact your credit score. The information that you defaulted on a payment is sent by the card provider to a credit reference agency such as Experian or Equifax. The reason for this is so if you were to apply for other forms of credit such as a cards or loans, any company that runs a credit check on your account will be able to see that you missed a repayment. This warns other credit providers to ensure that you are not offered more credit that you cannot afford.
In contrast, by repaying your credit card bills on time, the information will be fed back to the credit reference agencies and it will have a positive impact on your credit score.
Struggle to obtain future credit
The fact that missing repayment has a negative impact on your credit score, it may be more difficult to obtain finance and credit in the future. Of course, there are credit cards for bad credit and loans for customers with poor credit available but these usually come at a premium interest rate and the credit limit is reduced.
Reduced Credit Limited
Those customers who have defaulted on payments may receive a reduced credit limit by their card issues. In an attempt to reduce their spending, customers may be given a stricter limit on how much they can spend each month. A reduced credit limit may apply for new credit cards too as card companies try to reduce the risk of a customer defaulting.
There are some detrimental effects to your credit limit and credit score if you miss the repayment of your credit cards. Potential defaulters are encouraged to speak to their credit card company and to follow other tips we have provided.