In my first job after graduating from the University of Colorado with a finance degree, I worked in a regional bank headquartered in the Denver area. Part of my responsibilities included overseeing the internal credit card collections department, a team of two extremely nice team members who also ran the safe deposit boxes on the second floor.
If you were late on your credit card bill and missed the first couple of automatic notices by email and snail mail, you would likely get a call from one of these team members asking for a payment or plan to pay. But if you still didn’t pay, we did more than make a phone call.
Keep reading to find out why I think it’s best to keep your bank accounts and credit cards at different banks.
What Happens When You’re Late on a Credit Card Payment
Every time you pay with your credit card, your credit card company pays the merchant on your behalf. Whether you wait to pay a day later or months later, your bank is putting their money on the line trusting, based on your credit history, that you’re good for it and plan to pay your balance like you agreed.
If you’re late on a payment due date, a series of events of increasing cost to you begins. If you miss a due date by a week or two, you may fall within a grace period where the credit card company won’t do any more than charge interest. However, once you go past 30, 60 or 90 days after your due date, increasingly negative payment information shows up on your credit report, which can instantly damage your credit score for up to seven years.
After a certain period of time, the bank may assume you don’t intend to pay them back. That’s when the collections process starts. Some banks handle collections internally, as we did for many of our credit card accounts. Others outsource debt collection or sell the bad debt to specialized collection companies for a discount, who then take over trying to recoup the account balance.
In most situations, the worst thing that will happen is damage to your credit report and credit score, along with a deluge of calls from debt collectors. You may ultimately wind up getting sued by your credit card company for the balance. But if your credit card company also has access to your checking and savings accounts, there’s another way it may try to recover the balance.
Beware the Payday Money Snatchers
When someone ignored our letters and calls, we would look at their overall account profile to decide on the next steps. For example, if they had checking or savings accounts with us, it only took a few clicks to see balances and account activity, including direct deposits and other payments.
We would effectively garnish a customer’s wages in extremely rare situations to settle their outstanding credit card balance. If letters, emails, calls and messages went unanswered while there was no progress on a balance, we would assume the customer never intended to pay us back. The only option we had to get anything but losses would be to transfer funds from a customer’s checking or savings account to their credit card.
I remember one time in particular when the transfer was made on the customer’s payday. After months of “not getting our calls,” we heard from them very quickly. They were rightfully upset, but the bank didn’t do anything that wasn’t allowed in the customer’s account agreement. Had they kept her credit cards and checking accounts at different banks, this would never have happened.
With about 15 years of hindsight, I feel pretty bad for the situation the customer was in. But remember, in the bank’s perspective, they borrowed money that they agreed to pay back and hadn’t. Because they ignored all attempts to make contact and still saw regular payroll deposits in their account, we had to assume the worst and take the only option for recourse.
While you’re likely great with your money and would never be late on your bills, if you’re going to be late on your credit cards, it’s not a bad idea to keep your money somewhere else.
Ways to Avoid Missing Your Credit Card Due Date
Before this customer lost a paycheck to pay off a relatively small portion of her outstanding credit card balance, the entire situation started with a missed payment. If you’re worried about the same thing happening to you and would rather enjoy the convenience of keeping all accounts under one login, consider these tips to always pay on time:
- Use automatic payments for at least your minimum balance: Start by setting up automatic payments for at least your minimum balance. This preserves your credit in case you forget to make a payment, but interest may still apply.
- Add text and email alerts: Most banks give you the option to get email, text or push notification alerts when payments are due. Take advantage!
- Stick to a budget: Some people wind up in trouble spending more than they can afford with credit cards. Never spend more than you can afford to pay off in full by the next monthly due date.
- Utilize balance transfers judiciously: If you’re running up against trouble paying, consider a zero percent balance transfer card to take the pressure off temporarily so you can regroup and pay down your balance interest-free.
Stay One Step Ahead of Late and Missed Payments
If you keep your bank and credit accounts at the same bank, consider yourself warned. Your bank may be able to use your checking account balance to pay off your card without telling you first, as it’s likely allowed in your account agreement.
But your best option is to stay on top of those credit card payments and due dates. Good credit has many long-term benefits for your finances, and missed payments can wind up costing you a fortune in late fees, interest and higher interest rates later on. However, if you always pay your credit cards on time, you have little to worry about when it comes to keeping your accounts at the same bank.