Your credit score drops when you default on a loan, but it's impossible for anyone to predict exactly how far. People with great credit have the most to lose. Someone with a credit score in the 700s could lose 100 points because of a loan default, while another person with a 475 credit score might lose only a few points.
Credit Scores
Defaulting on a loan is very serious and generally your credit score punishes you for it. The score is a three-digit number ranging from 350 to 850. Creditors use the score to gauge your creditworthiness. People with scores in the 720 to 750 range are considered to have excellent credit and our coveted by lenders willing to offer quick approval on loans, mortgages and credit cards. Credit is available for people at the bottom end of the scale as well, but at much higher interest rates.
Charge-Offs
Information on your credit report is as important as your credit score, and this is where the loan default really hurts. The defaulted loan will show on your credit report as a "charge-off." That's an internal accounting term creditors use to describe an account that has been closed because of nonpayment. Technically, you default on a loan by missing one payment, but charge-offs generally comes three to six months later, depending on the type of loan. Auto loans are charged off after about three months and credit cards after six months.
Repercussions
People with recent charge-offs find it very difficult to obtain new credit at competitive rates. Creditors view the charge-offs as a sure sign that you are having financial problems and cannot be trusted with new credit. Charge-offs are listed on credit reports for seven years but sometimes can be removed by negotiating with the lender and making payment in full.
Credit Repair
Charge-offs can lead to additional negative information placed on your report, including repossession for car loans, foreclosure for defaulted mortgage loans and collection accounts for credit card debt. Having multiple negative entries makes it even more difficult to obtain credit. Defaulting on a loan has a huge negative effect on your credit at first with the impact lessening over time. Start rebuilding by paying off the defaulted loan. Then make a commitment to pay all your bills on time while keeping balances low. Your credit score will gradually improve over 12 to 24 months.
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