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What is a default on my credit report?
When you borrow from a lender and fail to pay back the debt, a default can follow you around like a black cloud. Learn how to keep this negative listing from affecting your credit score.
Life gets busy, bills fall behind and your financial focus lands elsewhere. No one plans on missing payments on their loan or credit card, however, it happens pretty often to consumers in the US.
The rules for defaulting on credit are different for each provider and type of debt. That’s why we’re going to clear the air and inform you about what type of accounts you can default on, how long it takes for an account to be listed as default and everything else you need to know.
What is a default account on my credit report?
A default on a credit report is listed when a consumer has borrowed money from a lender and has not followed through repaying the debt under the terms of the agreement.
Defaulting can be the result of making multiple late payments, missing consecutive payments or not making payments at all.
What kind of debts can I default on?
You can go into default on nearly every type of credit by not making your payments. Here are the most common accounts that consumers default on:
- Student loans
- Credit cards
- Home loans
- Auto loans
- Personal loan (secured and unsecured)
- SBA loans
- 401(k) loans
- Payday loans
Deferment is when you come to an agreement on a payment plan with a credit provider to avoid defaulting. Lenders would prefer that you defer your payments rather than default because it’s a sign of good faith that you plan to pay back the debt.
How long does a default stay on my credit report?
This type of black mark can stay on your credit report for up to seven years.
When you apply for financial products, lenders and providers will pull up your credit report and see that a default has been listed on a past account. This will likely flag you as a risky borrower and result in a denied request for credit.
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What are the consequences of default?
Once in default, the status of your account is typically reported to the three major credit bureaus to list on your credit report. It’s likely that your account will be sent to an in-house collections agency or sold to a third-party to collect the debt.
Following that, other consequences from defaulting on a loan can include:
- Drop in your credit score
- Unhealthy credit report
- Wage garnishment
- Home foreclosure
- Seized assets
- Accumulate late fees and interest
- Have your car repossessed
- Impact your ability to get credit in the future
- Court appearance to settle the debt
- Have the account go into collections
- Federal and state tax refund withheld
I have a default on my credit report, what should I do?
Take immediate action to find a solution. Start off by contacting your provider and find out if your account has been sent to collections already. If the credit provider hasn’t taken that action yet, communicate that you’d like to settle the debt directly and the lender may work with you to create a payment plan.
Other ways to deal with a default are:
- Pay the account in full. It’s not very common, but some creditors will remove the negative listing on your credit report if you pay the debt in full — this is called “pay for delete.” If you don’t negotiate your options for paying back the debt, you’ll never know.
- Settle the debt. Creditors will sometimes settle for less than what you owe in order to avoid taking a complete loss.
- File bankruptcy. Before you consider declaring bankruptcy, know that it stays on your account for up to 10 years. Filing bankruptcy should only be an option after you’ve exhausted all other alternatives of dealing with default.
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When can a lender list my account as default?
Typically before a default, the provider will contact you reminding you to pay your debt. After a few of these reminders, lenders have the tendency to get pushy and increase the frequency of calls to get you to pay back what you’ve borrowed.
Listed in the table below are grace periods and timeframes that lenders typically follow before listing your account as default.
|Type of loan||Days until account goes into default from last payment||Grace period|
|Credit card||180||1 missed payment|
|Student loan||270||90 days|
|Personal loan||90||Varies by provider|
|Auto loan||1-30||Varies by provider|
|Home loan||30||15 days|
Keep in mind that this all depends on your lender and what kind of loan you default on. Some providers will try to contact you for months before listing your account as default while others will take action if you miss one payment.
My debt is in collections, what should I do?
At this point, your credit has likely started to slump. However, your credit score being impacted has less to do with the debt itself, and more to do with the fact that its fallen into collections. Your next move should be to directly negotiate with the collection agency to reduce the debt.
When renegotiating, always keep everything documented and in writing. If the collector wants to speak over the phone, decline the call and continue the negotiation via mail. Once you’ve come to an agreement with the collection agency, pay the debt and start rebuilding your credit.
Getting calls from lenders and debt collectors can be overwhelming. And even though you can’t stop the original creditor from calling you to collect a debt, you can stop a third-party collection agency from calling you by sending them a cease and desist letter.
How to avoid credit default
There are preventive actions you can take to avoid a default listing on your credit report:
- Make on time payments
- Set up an autopay
- Create and stick to a budget
- Inform your lender of any name, phone number or address changes
- Borrow within your means
- Keep your debt to a minimum and try to pay it in full each month
- Reach out to the lender if you’re having trouble managing your debt
Also, read the terms and conditions of your financial product before signing your name on the dotted line so you fully understand the agreement between yourself and the lender. Some consumers skip this step because it seems time consuming, but it’s worth the it.
Defaulting on an account can cause your creditworthiness to take a hit and affect your ability to borrow in the future. By creating a budget to manage your finances responsibly, you’ll know exactly how much debt you can realistically take on and avoid any credit defaults in the future.
Though dealing with credit default can be tough — the good news is that it’s manageable. Reach out to your lender and try to settle the debt in a fashion that satisfies the both of you.
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