What Is Default And How Does It Affect My Credit Score?

Posted by Nick Niesen on November 8th, 2010

In simple terms, a loan default is when you have not made your agreed upon loan payments to the lender. There can be any number of reasons why a consumer may not have made payments, but once a certain period of time has elapsed, that non-payment record will become a part of the consumer's credit history. Once it becomes a part of the credit history (or credit record) it is available to be used during the formulation of the consumer's credit score.

Default can occur with any type of loan. Student loans, home loans, auto, SBA, 401k, and payday loans are all susceptible to loan default. One of the most common loans where default happens is with credit cards.

Consumers should understand that default is not the same as deferment. A deferment is a plan in which the payment is postponed by mutual agreement between the lender and the borrower. There are many types of deferment programs and plans available for consumers, and those who are in danger of defaulting on a loan should look into a deferment before the default actually happens.

In general, lenders prefer to see a deferment rather than a default on a consumer's credit record. A deferment tells the lender that you are at least willing to make the payment, even if the payment is late. Default, on the other hand, signifies to the lender that there is a far deeper problem with the consumer's finances.

Once a default is posted to a consumer's credit record or credit history it stays on file for up to seven years. Because of this long period of time, it is important for all consumers to avoid defaulting on a loan whenever it is possible.

One of the best ways to reduce the possible repercussions of a default is to contact the lender as soon as possible. If you are looking at missing just one or two payments, the lender may be able (and willing) to work some type of payment plan out with you. Most lenders are willing to do this because it is easier and more cost effective to work with a consumer than it is to foreclose on a home or repossess a car.

If your financial problems are going to more long term you may want to look into contacting a debt repayment agency. These are consumer credit agencies that work with you and the lender to make arrangements for alternative payment plans. In general, once a repayment plan has been approved by the lender, the consumer puts money into an account with the debt repayment agency and the agency makes the payments for the consumer. There are often restrictions associated with these plans such as the consumer agreeing to not take on any more debt while the plan is in effect, but these restrictions are usually for the good of the consumer rather than being punitive.

Whenever possible, consumers should do whatever they can to avoid default on a loan. A default will normally cause far more problems than the solution, even if the solution is to severely restrict the spending that takes place at home for a while.