It’s bad enough you have to pay 15% or more on credit card balances for goods and services you have long forgotten about. But, what happens when you get behind and are struggling to pay bills? Each late payment brings with it late fees of up to $40 per month. Then, if you get even further behind you might become subject to more punishment through the default interest rate.

Understanding Default Rates

The Credit Card Accountability Responsibility and Disclosure Act, otherwise known as the CARD Act, enacted laws that greatly helped consumers. No longer are you subject to a universal default rate, meaning when one card goes late, other companies you are current with cannot raise your rate. Companies are also no longer able to retroactively charge you a higher rate on existing balances, unless you activate the default rate.

The default rate is a significantly higher rate that is charged on outstanding balances if you become 60 days or more behind. So essentially, if you miss two payments then that 15% or 20% rate can go up to 30% and remain there until you bring the account current and make 6 on time payments. At that point the rate will revert back to the original rate for outstanding balances.

Cost of the Default Rate Charges

Getting behind on credit card debt can lead to financial failure because it snowballs out of control very quickly. Here’s a cost comparison of owing $10,000 at 15% with a default rate of 29%, based on bankrate.com calculations:

Credit Card Balance Interest Rate Minimum Payment (2%) Monthly Late Fees Amount to Interest Total Monthly Payment

Total Owed Not Including Late Fees

$10,000 15% $200 0 $125 $200 $25,573.35
$10,000 29% $300 $38 $242 $338 $46,445.52

In both these scenarios it would take over 30 years, making the minimum payment, to pay the balance off. The default rate could nearly double the amount you owe. Enacting the default rate could very well sink your very fragile financial ship, especially if the problem is exasperated with more than one account.

Account “Death Zone”

One of the biggest challenges is that once you get behind on a single credit card, getting caught back up can feel like climbing Mount Everest, because of late fees and higher interest. You must catch-up the account and make payments on time for 6 months before you will receive any relief from these rates, creating a “death zone” for your credit and reducing chances of recovery.

The period between your first late payment and charge-off, approximately six months later, can create a financial debt spiral. The account is often turned over to a collection agency when it is 120 days late and that results in collection calls. By the time the account is charged off, the balance could easily have doubled in size. When the account is charged off, late fees and interest may cease to increase, but now you face more aggressive collections from debt buyers and could face legal action from ballooned balances.

Instead of avoiding the financial disaster that is unfolding, being in the death zone, is the time to create a recovery strategy. This can be accomplished through a debt negotiation program, which may reduce much of the late fees and penalties and allow you to pay off the debt in a few short years. Even though it may seem like there is no hope, professional financial counselors can help you create a plan of escape.