How long a personal loan default affects your credit report — and how to recover from it

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If you've defaulted on a personal loan, don't worry. Many borrowers encounter unforeseen financial setbacks that prevent them from paying back loans. But do note that a loan default can serve to permanently scar your credit report — and impact your future ability to borrow. Here's for how long that blemish will remain, and how you can begin rebuilding your credit.

What constitutes a personal loan default

When you fall behind on payments for a personal loan for a long time — typically 90 to 180 days — your lender might label the loan "in default." The lender can then charge off the amount you owe, send it to a collections agency, or seek court action to get what you owe.

After a loan is defaulted, this fact is reported to the credit agencies (TransUnion, Equifax and Experian), where the default is added to your credit record.

For how long does the default remain on your report

In India, personal loan defaults will typically stay on your credit report for seven years from the last payment due date that resulted in the default. This applies whether you actually pay back the loan or not.

Within those seven years, the default will decrease your credit score, which could make it more difficult to qualify for new credit cards, personal loans, home loans or even rental contracts.

How your credit score is affected

A personal loan default can cause your credit score to drop sharply, especially if your credit was good before the missed payments. Payment history is the single biggest factor influencing your score — making up around 35% of it.

The newer the default, the larger its effect on your score. The harm decreases over time, particularly if you continue to handle other credit accounts well (paying on time and keeping balances low). But the default history will still be visible to lenders for the entire seven-year period.

Can you delete a default sooner

Alas, correct defaults can't just be "erased" from your credit report prior to expiration of the seven years. If the account is in error — say, if you never did default or paid the debt — you can dispute it with the credit bureau to have it corrected.

In a few situations, if you settle or pay off the defaulted loan, the status of the account will reflect "settled" or "paid," which is more attractive to prospective lenders. However, the history of the initial default will continue to be present on your report until it ages off. Steps to recover your credit after a default

Although you can't remove the default right away, you can start rebuilding your credit in the future:

•                     Timely pay off existing debts or collections associated with the defaulted loan.

•                     Timely make all existing and new credit payments.

•                     Timely pay down credit card debt.

•                     Avoid opening several new credit accounts simultaneously.

•                     Use a secured credit card to show responsible use of credit.

As months and years pass, a strong recent credit history will gradually outweigh the old default in lenders' eyes.

A default on a personal loan is going to stay on your credit report for seven years and have a serious impact on your credit score. But the earlier you act to clear the debt and restore your credit record, the sooner you can start getting your finances back on track. If you're currently having difficulty making loan payments, call your lender early — it may be possible to arrange more reasonable terms and prevent default altogether.