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Missed credit card and loan payments have a big effect on your credit. When you fall weeks or months behind on payments and your account goes into default, your credit scores can take a huge hit.
But, like other negative records, defaults don't stay on your credit forever. Depending on several factors, you may see an increase in your scores when the default is removed.
The Different Types of Defaults on Your Credit Report
Default typically happens when you miss multiple payments on a debt. Usually, after several attempts to contact you and work out a solution, your creditor will determine that you're defaulting on payment. Your account will then be transferred to a collections department or sold to a collections agency.
The timeframe and consequences can vary, but here's an overview of common types of default:
- Mortgage: Default generally begins after 30 days of nonpayment. After three to six months of missed payments, a mortgage lender will likely initiate the foreclosure process and ultimately attempt to sell the home.
- Auto loan: For some lenders, an auto loan can go into default when you're as little as 30 days late on payment. Once you're in default, the lender can repossess the vehicle and sell it at auction.
- Unsecured loan: Default on an unsecured loan (one that isn't backed by collateral) can happen after 30 to 90 days of missed payments, but lenders may use differing timelines. Default will typically result in the debt being transferred to a collection agency, and you may be sued in an attempt to get payment for the debt.
- Credit card: Six months of nonpayment on a credit card usually results in a charge-off, at which point your debt is sold to a collection agency.
- Secured credit card: If you default on your payment, the creditor can use your deposit to cover the balance due. If the deposit doesn't cover your bill, the debt could be charged off. Keep in mind that defaulting has credit consequences even if the deposit fully covers your outstanding balance.
- Student loans: How long it takes to default on a student loan varies based on the type of loan as well as the lender or loan servicer. The default process for private student loans could begin as soon as you miss one monthly payment, and result in the loan being charged off after a certain period of time. Federal loans go into default once you're nine months late on your student loan payments, and may result in wage garnishment and tax refund withholding.
How Can Disputing a Default Impact Your Credit Score?
Filing a dispute on your credit report does not hurt your credit scores. But filing a dispute doesn't guarantee you'll get information removed. The dispute process is only meant to remove incorrect information, which means it will not remove a default, missed debt payment, charge-off, collection account or any other information that's recorded accurately.
If you find inaccurate information on your credit file, filing a dispute could have it removed. Removing a default or other inaccurate information that's hurting your scores isn't guaranteed to make a huge improvement, however, since other factors are considered in your score calculation.
How Does a Removed Default Account Impact Your Credit Score?
When a default first shows up on your credit file, you'll likely see a big drop in your scores. That's because the more recent negative information is, the bigger the impact to your scores. The events leading up to the default, including missed payments, will also contribute to credit score harm.
Over time, the impact of a default on your scores will lessen. Like all negative information, the default will naturally drop off your credit file after a period of time, at which point you might see another minor increase in your scores.
Default will remain on your credit reports and be factored into your scores for seven years from the month you stopped making payments on the debt. In the meantime, practicing healthy credit habits can help you rebuild your credit and recover from the default.
How to Avoid Defaulting on Loans in the Future
Even if you can't keep up on a bill payment, there may be ways to prevent default. If you're proactive in exploring your options, you could potentially avoid the fees, damage to your credit, or loss of property that can happen as a result of default.
Here are some preventive measures to consider:
- Reach out to your lender. Communicate with your creditor before you fall behind. Your lender may be more flexible if you reach out while your account is still in good standing, and you could potentially work out a modified repayment plan that fits your budget and prevents you from falling behind.
- Ask about deferment. If you can't afford to pay much, or anything toward your debt, ask your lender about getting payments temporarily deferred or even suspended through a forbearance plan.
- Consolidate debt. If your credit is in good standing, or if it improved since you took on your debt, you may be able to consolidate your debt and avoid falling behind by taking out a new loan with more affordable payments. You can use Experian CreditMatch™ to find a debt consolidation loan that works for you.
Rebuilding Your Credit
Negative information, including defaults, on your credit reports can bring down your credit scores. Defaults naturally are removed from credit reports after seven years, but can be removed earlier if they are determined to be inaccurate. The removal of a default can improve your scores, but if you want a strong credit file over the long haul, you'll need to add positive information too.
Steps you can take to build strong credit include paying bills on time every month, keeping your debt balances low and taking care of any past-due accounts or charge-offs. Reviewing your credit report and scores can also help you find other opportunities for improvement.