This post originally appeared November 17, 2016 on CreditCards.com as “Witholding payment after dispute goes against you”
By Barry Paperno
Dear Speaking of Credit,
I was overcharged on my credit card by a merchant who used his brother to distract me while signing the credit card slip. If I refuse to pay the amount on my credit card bill because the credit card company sided with the merchant and is holding me liable, how much damage will that cause to my credit? How do I best get out of this situation without long-lasting effects? I am sick over this whole transaction. He overcharged me $3,000. Any help or advice will be greatly appreciated. – Diana
It’s unfortunate that you weren’t able to work this out with the merchant. It also doesn’t help that the card company took the merchant’s side in your dispute. Having been left without much in the way of options, you are right to be asking about the consequences to your credit of simply refusing to pay the bill.
I’ll share with you some of the credit reporting and scoring downsides from failing to pay this portion of the bill. I will also offer you an alternative that will protect your credit and could lead to you getting that $3,000 back.
But first, I want to share a little background for the benefit of others.
Under the Fair Credit Billing Act, you had the right to withhold payment of the disputed amount while the dispute investigation was pending. During this time, the card company was not allowed to report the withheld payment as late. Following their rejection of your claim, you then had the right to appeal the decision within 10 days of receiving the card issuer’s written explanation of the investigation results. However, such a challenge simply places a notation on the credit report indicating that you continue to dispute the accuracy of the charge. It does not prevent the account from being reported as late, if that’s the case, nor does it prevent any negative impact to your credit score.
Those who win disputes see the amounts wiped off their bills. Those who lose owe the amount, plus interest.
It sounds like you have gone through the dispute process, and have lost.
If you are considering holding back the payment anyway, know that the first scoring casualty will take the form of a late payment or delinquency. That will harm your payment history, which makes up 35 percent of your score.
The damage will occur once 30 days go by without at least a minimum payment on the credit card bill that contains the $3,000. With an excellent score in the upper 700s or higher, expect your score to take a dive of 100 points or more. If your score is a bit under 700 or lower, the score drop won’t be quite as drastic, though a loss of 80 points wouldn’t be unheard of.
If that $3,000 balance then continues to go unpaid, with each month that passes you’ll continue to dig yourself a deeper credit scoring hole while incurring late fee upon late fee. If this trend continues for six months or more, the debt will be charged off as a loss by the card company. It is then likely to be sent to a collection agency that will add a new collection item to your credit report while coming after you for payment.
Ultimately, if this debt continues to go unpaid, you could also be sued, either by the card company or the collection agency. If successful, along with running the risk of wage attachment, you would then see a court judgment added to the growing list of negatives on your credit report. In fact, that would make a total of three seriously derogatory items related to this debt that will spend the next seven years on your credit report and in your credit score.
This $3,000 balance remaining on the card could also help elevate the credit utilization percentages (balances/credit limits) within your score that measure how much of your available credit you’re using. While not likely to heap as much damage as three derogatory items will, raising this percentage could lower your score even further.
Had enough of this worst-case scenario? There is a next step that could resolve your situation, albeit at a price.
Pay the debt, go to court
If you’re willing – and can afford – to pay that disputed $3,000 before allowing it to damage your credit, you can both protect your score and take legal action to recover the debt via small claims court.
Protecting your credit while undergoing this legal maneuver will require making minimum monthly payments, paying in full, or somewhere in between – but pay it you must if your credit is important to you.
Any hopes of buying a home or car, applying for an unsecured credit card, or even renting an apartment during the next few years, could effectively be dashed if you don’t take steps to protect your score now. Allowing this debt to go unattended could result in denial of a future credit application. Or, if credit is approved, a poor score could leave you with higher interest rates costing you more than $3,000 over time – especially with a mortgage or auto loan.
Small claims court offers people the chance to resolve disputes like this at a very low cost, since you’ll be representing yourself, and without much difficulty. Just by doing a little homework and organizing your evidence in presentable manner, a small claims court suit against the merchant will enable you to tell your side of the story to a judge and give yourself a chance at recovering that money.
Of course, the burden will be on you to prove to the small claims judge that you were misled by the merchant. If not, you will have largely exhausted your last affordable method of recovering that $3,000; knowing, however, that you learned a valuable lesson and invested in a better future by protecting your credit.