A loan default can be a huge emotional and financial blow. Besides damaging your credit score, it may affect any future lending opportunities you will have. But don’t worry, you can fix your credit profile and financial situation if you take the right steps and get on the right path.
Understand the impact of loan default
A borrower defaults when they stop repaying a debt as agreed, typically after a string of late payments. It also can remain on your record for up to seven years and negatively affects your credit report, resulting in a major drop in credit score.
Steps to rebuild your credit after a loan default
1. Review your entire credit report
This means reviewing your credit report from all the major bureaus- your first step in the recovery process. Look for:
- Default entries for status.
- Payment delays.
- Any inaccuracies or errors.
Once you notice errors, dispute them with the credit bureau and request an update.
2. Resolve or settle outstanding debts
Speak with your lender and see if you can:
- Reach a settlement or repayment plan.
- Consider a one-time settlement (OTS).
- Once everything is settled, request a “letter of closure.”
Settled accounts show your intention to pay off the debt and this is a good thing even if they don’t immediately improve your credit.
3. Planning & preparing
Start preparing to plan your budget and repayment plan. After default, you must draw a reasonable budgetary plan each month. You will have to prioritise:
- Paying down your current EMIs.
- Not acquiring more substantial debts.
- Creating an emergency fund.
Following a strict budget is positive behaviour in terms of your financial future, and will help prevent further defaults.
4. Choose a secured credit product
Tools for secured credit, such as:
- A credit card secured by a fixed deposit.
- A credit builder loan.
This all helps you in rebuilding your credibility with the credit bureaus. If you want to see your score slowly rise, make sure you pay your repayments on time, and carry a small balance on your credit.
5. Keep an eye on your credit regularly
Rebuilding credit takes a lot of time and work. You should check your credit score at least once a month.
Observation is essential for:
- Monitoring progress.
- Spot any bad items as early as possible.
- Keep you accountable and motivated.
6. Do not apply for more than one loan
You could end up making it worse with hard enquiries from repeated loan applications. Avoid applying for any new unsecured credit products until your credit is under stable.
7. Consider consulting a professional
If you feel overwhelmed, consider finding a workplace financial advisor or credit counsellor. They can help you:
In conclusion, patience and consistency are key. While a loan default is damaging to your credit report, it is not the end of the road. You can slowly improve your credit by practicing self-discipline, working hard, and doing the right financial thing. Remember that one responsible decision is the first step to recovery.
Disclaimer:Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.