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Delinquency

Will a Default Be Removed if It’s Paid?

Dear Experian,

If I default on an account but then pay it off later, will it be removed?

- JJB

Dear JJB,

When you default on an account, the negative information associated with it will remain on your credit report for seven years from the date of the first missed payment, even after the account has been paid in full. Once paid, the account will be updated to show that there is no longer a balance owed, but your credit report will continue to reflect the payment history of the account.

What Does It Mean to Default on a Loan?

Defaulting on a loan means you've stopped making payments as agreed. How delinquent an account must become to be considered in default depends on the lender and the type of account. While most lenders will not consider an account to be in default unless it is at least three to six months past due, a mortgage loan may be considered in default after only one missed payment. On the other hand, federal student loans may be allowed up to nine months of missed payments before being placed in default.

What happens when you default on a loan depends on the type of debt you were unable to pay. Defaulting on a personal loan or a credit card account will likely result in the account being written off as a loss and updated to reflect a status of charge-off on the credit report. The lender may then sell the debt to a collection agency. Once a collection agency purchases the debt, they can report it to the credit reporting companies as a separate account.

When you default on an auto loan, the lender can repossess your vehicle. This means that they take possession of your car and sell it to try to cover the outstanding loan amount. Your lender's policies and state laws determine how delinquent your payments must be before it considers your auto loan in default and begins the repossession process.

If you were to default on a mortgage loan, the consequences may be even more severe. Your mortgage lender will send notices of default and may try to contact you by phone in order to make payment arrangements. If you continue to miss payments and the loan becomes 120 days or more past due, the lender can begin foreclosure proceedings. This means that the lender will take ownership of your home so they can sell it to recoup the amount you owe on the loan. Foreclosure can be disastrous to your credit health.

How Long Does a Default Stay on Credit Report?

Like most negative information, a default on an account may remain on the credit report for seven years from the original delinquency date and affect your scores the entire time. The original delinquency date is the date the account first became late and after which was never brought current.

Although both a delinquency and a default are considered negative, a default usually doesn't happen until you are seriously past due, and therefore is considered more derogatory. By the time a borrower defaults on an account, there likely will be several late payments associated with the account, which impact credit as well.

While paying off a derogatory account does not automatically remove it from your credit history, the account will be updated to show that it has been paid and that there is no longer a balance on the account. Many lenders view a past due account that has been paid off more favorably than an account that is still outstanding, so paying off an account that is in default can be beneficial.

Once the account reaches the end of that seven-year time period, it will be automatically removed from your credit report. How much your credit score is impacted when a negative account is removed depends on the strength of your credit history and the other account information listed in your credit report at that time.

If you feel that an account appearing in your credit history is not being reported accurately, you can dispute the information quickly and easily online using Experian's Dispute Center.

Tips for Avoiding Future Defaults

If you are having trouble making your payments and think that you may miss a payment deadline, it's always best to contact your lender to discuss your options before you become delinquent.

Due to the ongoing coronavirus pandemic and legislation such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, many companies are offering payment accommodations, including forbearance or deferment, that can help you avoid defaulting on your account. While some of the CARES Act benefits have already expired, or will soon, your lender may continue to offer assistance.

If you are approved, your payments will be paused temporarily and will not be reported as late during the deferment or forbearance period. If your account was current at the time you entered into the program, your lender will continue to report the account as current for as long as your account payments are paused.

You may also consider exploring options such as debt consolidation. If you have good credit and can qualify for a loan or a new credit card account with a favorable interest rate, consolidating your debt into a lower-interest account may help you manage your payments more easily so you can avoid delinquency and default.

If you have had credit difficulties in the past, the best way to stay on top of your credit situation going forward is to order your free credit report and credit score frequently. When you order your free score from Experian, you will also receive a list of the top risk factors that are most impacting your scores at that moment. By keeping track of your credit accounts and improving on those risk factors, you can begin improving your credit scores.

Thanks for asking.
Jennifer White, Consumer Education Specialist