5 Questions on Credit Card Debt Answered
The credit card is one of the most widely used financial instrument and at the same time the most troublesome product that puts the users in trouble. The interest rates are high and each month the bill rises to stratospheric levels, when unpaid.
In this article you will understand:
- What happens if you don’t pay credit card bill?
- What is revolving credit card debt and its working?
- Why credit card interest rates are so high?
- Is it worth paying this debt in installments?
- If I fail to pay one card, will the others I have get blocked?
(1) What happens if you don’t pay credit card bill?
Letting credit card debt accumulate is a trap for financial health. This is because the interest rate on the overdraft card is extremely high.
So, before you let this bill accumulate and the interest rates skyrocket, it is very important to seek a negotiation with your credit card company as soon as you are aware that you owe. This is called “out-of-court negotiation”. Unlike when there is legal involvement, the out-of-court negotiation is done directly with the agency where the debt was incurred.
But how to negotiate credit card debt? In many cases, it is not necessary to go in person to a bank branch or speak to an attendant over the phone.
Some financial agents do the negotiation entirely online, on the credit card website or application. This makes the process easier and faster, both for the consumer and for the financial institution.
But beware: Before signing the debt renegotiation contract, understand whether you can afford the monthly installments.
(2) What is revolving credit card debt?
Do you know when you can’t pay the bill in full and only pay the minimum amount? This is called revolving credit. In short, this can also be considered a type of loan.
Example: The bill was $1,000, but you only paid $500. The other $500 will be added to your next bill with interest.
How the revolving account works?
Besides the high rates, the revolving account is limited because it lasts a maximum of 30 days. After this time, the holder must pay the account in full or installments with lower interest.
The revolving credit is released automatically in your account and, as this money is spent, the “quota” runs out. As soon as you pay off the account, you will have the amount available again.
(3) Why are credit card interest rates so high?
Every institution, when lending money, takes the risk of not having the amount returned on time. To compensate for this possibility, high interest is charged for the time you have not paid the amount back.
(4) Is it worth paying credit card bill in installments?
When you decide to pay your bill in installments, what changes is that you can no longer extend your debt indefinitely and now have one more financing option. But this does not mean that the installment plan is the most advantageous option.
Look at your statement to understand what interest rate the issuer has fixed in your contract. They usually vary between 0.99% to 9.99% per month. However, few people will get the minimum rates, because the tendency is that most users stay close to 9.99%.
This is because, in the credit analysis done to issue the installment, the institution will evaluate the customer’s history. Since the person has spent 30 days in revolving accounts and needed to pay the bill again, he or she is in the risk of default.
To avoid receiving a default, companies usually price this risk by increasing the interest charged.
(5) If I fail to pay one card, will the others I have get blocked?
No. If you have several cards and are in default because you have not paid the invoice amount of one of them, the other companies cannot prevent you from using this means of payment.
This is because the other financial institution is forbidden to deny the use of credit when a customer is in default.
I am Nikesh Mehta, owner and writer of this site.
I’m an analytics and digital marketing professional and also love writing on finance and technology industry during my spare time. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected] or LinkedIn profile.