What Should You Do If You Can’t Make Your Credit Card Payments?

Life happens. You might have a plan, but then one day, you wake up and encounter a problem. You might need to make a last-minute trip to visit a sick family member. Or you lose your job in an economic downturn. At times like these, it’s ideal to turn to an emergency fund, but what happens if you don’t have one? One of your initial thoughts might be: “Why don’t I just carry a balance on my credit card this month?” Not a bad idea, right? Unfortunately, it’s not ideal. In this article, we will discuss why and what you should do if you are unable to pay your credit card bill.

Penalties for missed credit card payments

When you miss a credit card payment, you can see consequences starting almost immediately, including:

·       Late credit card payment fee. This charge will show on your account if you do not make a payment on time. If you are a bit short of the minimum payment, you will also see this charge.

·       Penalty annual percentage rate (APR). Your regular interest rate may increase when you miss a payment. Some cards will have an increase to around 30% APR, making it that much more difficult for you to pay off the balance.

·       Risk of a debt spiral where you are unable to manage your debt. Instead of being able to pay off your card balance, you may need to borrow money in order to make your payments.

·       Impact on your credit score. Missing even a single payment can cause your credit score to fall.

While these are the immediate effects of missing a payment, they don’t stop there. If you continue to fall delinquent on your payments, your account can go into default or get sold to a debt collection agency. Ideally, this is something you want to avoid, which is why it is better to take immediate action.

Steps to take if you are going to miss a credit card payment

As we established above, there are complications when you don’t pay your credit card. To minimize these consequences, consider the following actions:

Step 1: Contact your credit card issuer

Pick up the phone as soon as you think you might not be able to make your payment. The major banks and credit card companies would rather work with you than chase after unpaid debt. Some of the options they may offer are temporarily deferring or reducing your payment. If you are a reliable customer, they may provide you with a lower interest rate or waive the late fee. But the important thing here is to call and ask.

Step 2: Make the minimum payment

After you have spoken with your bank, make the payment that you can. Ideally, you can meet the minimum payment and maintain a healthy credit score.

Step 3: Evaluate your finances

When money is tight, it’s best to sit down and get a clear picture of where it’s going and understand why you can’t pay your credit card bill. Develop a budget focusing on the basic categories of housing, utilities, groceries, and transportation. Once you know you have your essentials covered, then you can allocate the remaining funds to cover your credit card balance.

Step 4: Explore other short-term solutions

If you find yourself consistently running into money trouble, it might be time to re-evaluate your plan and get help bridging the gap. Consider the following options:

·   Balance transfer credit cards. These cards come with low, and sometimes 0%, interest rates for the first year. This means you can buy yourself time to pay down the balance without additional interest.

·   Personal loan/line of credit. By taking out a loan or line of credit at a lower interest rate, you can use the proceeds to pay off your credit card. The reason this makes sense is that credit cards typically charge higher interest rates than personal lending products. By using your loan as a source of funds, a larger portion of your credit card payment would go towards the principal rather than interest. In turn, this will help you pay off the debt faster.

While these options can help, think of them as a fallback only. The best course of action, whenever possible, is to pay your balance in full each month.

What to Do if You Can’t Make Any Payment

Ask about hardship programs.

Some issuers (like RBC, TD, Scotiabank, and BMO) offer temporary relief during illness, job loss, or emergencies. These are not automatic — you have to request them.

Contact a non-profit credit counsellor.

Organizations such as the Credit Counselling Society or Consolidated Credit Canada can help you negotiate with creditors and build a repayment plan that protects your credit as much as possible.

Planning ahead

Life can easily get in the way of even our best plans. So it is ideal to have backup options and a money-saving plan. For example, consider building an emergency fund that can cover at least three to six months of expenses. This can help by acting as a cushion in the future should you run into this issue again. But remember to rely on it only when necessary.

Before you can aim to save several months of expenses in your emergency fund, you must have an idea of how much you are spending. Review your habits and track how much is going out each month. If you are overspending and fall short on a consistent basis, then it is a red flag. It should prompt you to change your habits.

Using credit cards can help you build a credit score, earn points and even manage your cash flow. But the key is to use the card responsibly. Reserve your card usage for planned purchases and emergencies only. And don’t forget to commit to paying in full each month.

Conclusion

You might be in a financial crunch but you have options beyond falling behind on your credit card payment. Act quickly! Whether that be calling your credit card provider, making a partial payment, or revisiting your budget, there are solutions. However you choose to proceed, remember that it is best to use your credit card as a tool rather than treat it like a personal loan.

For tips on How to Get Out of Credit Card Debt, check out FinlyWealth’s post here.