Not knowing what will happen to your credit history if you're about to default on a loan feels like having an anvil hanging over your head. There are consequences, sometimes severe, when loan payments are in default. However, it is possible to recover and more quickly than you may imagine. Remember: It's always darkest before dawn.
Late Payments
How long and how frequently you've been late has a significant effect on your credit history. FICO, the Fair Isaac Corporation, considers three factors: the frequency, severity and recency of your late payments. For example, one 30-day-late payment from two years ago will affect your history much less than several recent 60-, 90- or 120-days-late payments. Also, being late on a mortgage or other secured installment loan has a stronger negative effect than a missed credit card payment.
Account charge-offs should be avoided at all costs, because even accounts that are as late as 150 days can be made current. Once an account goes to collection or is marked as a judgment, the delinquency will remain permanent.
Late Payments and Your FICO Score
Your FICO score is calculated using five factors: timeliness of payments, amounts owed, length of credit history, new credit and types of credit. More than 1/3 of your FICO score -- 35 percent -- is comprised of timeliness of payments. Therefore, being in default for as little as 30 days is significant.
There is no one-size-fits-all approach to credit scoring, however, because of other factors. A consumer with an excellent credit history who suddenly defaults may experience a significant, immediate decline in creditworthiness; a consumer who has a history of late or missed payments will find his score may not change much with a default. Keep in mind, however, that the consumer with frequent late payments already has a much lower score than the consumer with excellent credit.
How Long Credit Damage Lasts
Time heals all wounds: The more distance you put between yourself and your last late payment the more your credit recovers. However, be advised that late payments, foreclosures and delinquencies last on your report for seven years. Bankruptcies can last as long as 10 years. Unpaid tax liens can last forever (along with other matters of public record, like criminal convictions).
This is one good reason to make good on your loan agreement. Creditors are anxious to work with you, even if you're 150 days late. As long as the account remains open and you are making regular payments, you increase the chance that the account will be made current.
Alternatives to Missing a Payment
Don't hesitate. Call your creditor the moment you think there may be a problem. Credit card telephone agents may offer to lower your interest rate, payment, or both; this action won't affect your credit. A creditor may also offer to put you in a more affordable repayment plan. Don't be afraid to call all your creditors to ask for friendlier terms; then put the available cash toward paying off the highest-interest debt first.
Alternatively, contact the National Foundation for Credit Counseling. This nonprofit specializes in working with consumers who are struggling to manage their debt loads. Ask about debt management plans to satisfy your loan obligations.
Know Your Rights about Debt Collection
If your accounts go to collection, learn your rights. Debt collection agencies may only contact you during certain hours and some tactics are illegal. They may not contact you at work -- but you have to indicate that you're not permitted to get collection calls there.
You may also be able to negotiate with a collection agency, but you'll be much better off working with your creditors. In addition to salvaging what remains of your credit history, you'll be able to sleep better at night knowing you did the right thing, so don't be afraid to take the first step.
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