Understanding Delinquent Credit Cards: Definition, Example, Impact

What Is a Delinquent Account Credit Card?

Credit card companies consider a credit card to be delinquent if the customer has failed to make a minimum monthly payment for 30 days from the original due date.

Generally, credit card companies will begin reaching out to the customer once their minimum amount due on the account has been late for 30 days. If the account is still delinquent for 60 days or longer, the credit card company will typically begin the process of debt collection. This process can involve legal action and the use of credit collection firms. A delinquent account on a borrower's credit report can have long-term consequences on the borrower's ability to obtain new credit.

How Delinquent Credit Card Accounts Affect Your Credit

One of the first steps taken by credit card companies upon detecting a delinquent account is to try to contact the account holder. If an agreement can be reached with the customer in a timely fashion, the credit card company may not take any further action. However, if an agreement cannot be reached, the company will likely begin by reporting the delinquent account to a credit reporting agency.

For this reason, delinquent accounts can have a severe negative effect on a borrower's credit rating, particularly if the delinquency persists beyond the 60-day mark. Generally, the immediate impact of delinquency is a 25- to 50-point decrease in the borrower's credit score. However, additional decreases can occur if the delinquency is not corrected thereafter.

Account delinquencies are one of the most challenging factors to overcome for borrowers seeking to improve their credit score, as they can remain on a borrower's credit report for up to seven years. For some borrowers, this could mean dropping from a very competitive credit score to one which is merely acceptable, such as dropping from 740 points to 660. Depending on the terms of the credit card in question, the borrower may also be faced with additional monetary penalties if their account becomes delinquent.

Most credit issuers maintain proprietary debt collection services for early delinquencies. However, delinquent credit card accounts that remain unpaid will eventually get sold to a third-party debt collector. These debt collectors are charged with obtaining the original debt owed with interest and may take legal action.

Debt that is considered written off is also reported to credit bureaus and can have an even greater negative impact on a borrower's credit score than one-off delinquencies that are subsequently corrected.

Credit card debt is a significant issue in the United States, with a total of $807 billion owed across approximately 506 million cards in 2021. The average American family credit card debt is $6,270 with 45.4% of American families carrying some credit card debt.

Real-World Example: Managing a Delinquent Credit Card

Mark is a client of XYZ Financial, where he holds a credit card. He uses his credit card regularly for a variety of purchases and typically pays only the minimum payment required each month.

One month, however, Mark forgets to make his payment and is contacted 30 days later by XYZ. He is told by XYZ that his account has become delinquent and that he should promptly make up for the lost payment in order to avoid incurring a negative impact on his credit score. Because the missed payment was unintentional, Mark apologizes for the oversight and promptly makes up for the lost payment.

If Mark had refused to make up the lost payment, XYZ may have had to collect on his debt. To do so, they would have first reported the delinquency to one or more credit reporting agencies. Then they would either seek to collect the debt themselves, or they would rely on a third-party debt collection service. If Mark was unable to pay his outstanding debt, this would have impacted his credit score.

The Bottom Line

Delinquent accounts can refer to credit cards with a minimum payment that has not been made for 30 days or more. Credit card companies initially reach out to borrowers to address missed payments; if unresolved, it may lead to debt collection and legal action. Delinquencies can significantly impact a borrower’s credit score and remain on credit reports for up to seven years. Borrowers should be proactive in addressing missed payments to mitigate negative financial consequences. Credit card debt remains a prevalent issue, making it important to manage payments responsibly.