Q: My friend and I are about to head down to Central America for a month and a half, a bucket list trip for both of us. We’ll be heading into remote areas where I don’t think I’ll be able to get online to make my credit card payments. For the five years I’ve had my credit cards I’ve always made at least my minimum payments on time every single month. With my good payment history, skipping payments for one month and catching up when I get back to Canada shouldn’t be a big deal, or am I wrong? ~Sean
A: Even though you have always made the minimum payment required on your credit cards, skipping just one payment can negatively impact you for a number of years to come. Most people aren’t aware of this, which is why it’s so important to read and understand your credit card agreement. In the agreement it will outline the terms you have agreed to, the interest rate, interest-free period if applicable, fees that may apply as well as the implications of making a late payment.
Below are the four key risks you will expose yourself to if you make late credit card payments.
Taking all of them into account, I’m sure you’ll agree that it’s in your best interest to make alternative payment arrangements before you leave.
If you’re late with a payment or skip a payment, expect to be charged a late fee on top of the interest that will accrue on the outstanding balance. Your credit card agreement will specify how much of a late charge you will have to pay.
Your Interest Rate Will Increase to the Penalty Rate
Most people who have been late with a payment are shocked when they receive notification that their credit card company has increased their annual interest rate the month following the late payment. The annual interest rate may increase by five per cent or more and you will have to make your monthly payments on time for up to a year before they will agree to lower the rate again. If you typically carry a balance on your credit card, you’ll literally be throwing money away as a result of the extra penalty interest charges you’re required to pay.
Your Lender May Lower Your Credit Limit
While this is a drastic step, if your credit card company cannot reach you to find out why your payment is late and you do not respond to their requests to contact them, they have the legal right to lower your credit limit. Nothing would be worse than to find out that your credit card has been declined when trying to rent a car or book a hotel room when you are out of the country.
Missed Payments are Reported to the Credit Bureau Companies
If you have a payment that is more than 30 days late your creditors may report this to Equifax Canada and TransUnion of Canada, the two credit reporting agencies operating in Canada. In this case the late payment will show up on your credit report and negatively impact your credit score for a period of time. This could even affect a loan or mortgage application down the road because the late payment can stay on your credit file for up to six years.
What to Do Instead of Skipping Credit Card Payments
It’s amazing how much of an impact your credit rating could take by simply missing a payment on your credit cards, not to mention all the extra fees and interest you will also have to pay. The good news is that you’ve taken the time to ask this question in advance of your trip.
With time on your side, I would strongly encourage you to contact your bank and find out how to set up a one-time automatic payment from your bank account to your credit cards so that your monthly payments are received on time. This service is typically offered through online banking, so if you’ve never tried it before, contacting your bank to make sure you set it up correctly will give you peace of mind.
The Bottom Line on Managing Credit Cards Wisely
A credit card is a tool, and much like using a washing machine, it’s important to fully understand how to operate the tool before using it. Failure to do so may cause damage that is costly to repair. Furthermore, keep in mind that credit cards were originally designed for safety and convenience and not to be used to carry a balance. If you’re finding it difficult to pay your credit card balances in full each month, it’s probably time for a budget tune-up. Contact your local not-for-profit credit counselling agency to help you get your spending in line with your income and financial goals.