How to rebuild your credit after defaulting on a loan

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Missing a loan payment can be a dead-end situation financially. It not only compounds your current ability to borrow, but it reduces your credit score as well, so future loans will cost more or be unavailable. The damage is not irreparable, though. With a sound plan and a little bit of time, you can rebuild your credit file over time and take back control over your finances.

Know the effect of the default

The first thing to do is to verify your credit report. In India, you can view your report from credit bureaus such as CIBIL, Experian, Equifax, or CRIF High Mark. A default reduces your credit score by 100–150 points and will remain on your report for seven years. It also notifies lenders that you are a high-credit-risk borrower.

Pay pending dues or negotiate a settlement

If you haven't already, discuss with your lender. Perhaps you can settle the amount owed or pay it off in full. In a full payment, your credit report will indicate the loan as "closed," which is preferable to "settled." In a settlement, your report will indicate that you paid less than was owed, which still hurts your credit profile—but is preferable to leaving it unpaid.

Obtain a 'No Dues Certificate'

Once you repay or settle, make sure to receive a No Dues Certificate from the lender. This will serve as official confirmation of clearing your dues. Moreover, ask the lender to report the closure or settlement with the credit bureaus, which may take around 30–60 days to update.

Begin small in order to rebuild your score

Rebuilding your credit score involves re-creating a history of good borrowing. Get yourself a secured credit card or a small consumer loan (such as an electronic EMI-based purchase) and pay all the dues on time. Even small sums, paid regularly, are enough to increase your creditworthiness in the long run.

Be financially disciplined and onwards

To prevent future defaults, prepare a monthly budget, make payments on time, and do not take too much credit. Use reminders or auto-debits to ensure payments. Do not apply for multiple loans simultaneously, as multiple credit inquiries can additionally damage your score.

Regularly check your credit report

Monitor your credit score every few months to gauge your recovery. If you see mistakes—such as stale default information or incorrect loan information—file a dispute with the credit bureau. Fixes can boost your score with the pick-me-up it desperately needs.

Defaulting on a loan can be a major setback, but it’s not the end of the road. With consistent effort and financial discipline, you can rebuild your credit and unlock better financial opportunities in the future.