Securing a loan is one of the most common ways to take care of unexpected financial needs. It can be used for purposes such as medical expenses, home renovation, or funding education. If used wisely, it serves as a powerful tool for achieving your goals.
However, it is important to be aware of the consequences of defaulting on a loan. Failure to make timely payments towards your personal loan instalments can impact your credit score, reducing the chances of approval for new loans or credit cards in the future.
Let’s take a look at how a loan default impacts your credit score and how you can take corrective measures to maintain a healthy credit profile.
Impact Of Loan Default On Credit Score
Failing to make timely payments of equated monthly instalments (EMIs) for your existing loans can negatively affect your credit score. It will hurt your chances of securing loans and credit cards in the future as you will be perceived as a risky borrower. Even when you do get a loan, the interest rate is likely to be significantly higher.
Your loan default will be marked on your credit report and stay there for seven years. As the credit report is reviewed by a financial institution while giving a loan, it is in your best interest to never default on a loan.
Tips For Rebuilding Credit Score After Loan Default
Analyse Your Credit Report: It is crucial to study your credit report and see how your loan default has impacted your credit score. If you find any errors, you can contact the respective credit bureau to resolve it.
Build a Good Credit History: After a default, unsecured loans or credit cards are hard to obtain. Opt for secured credit options to rebuild your credit history.
Make Timely Payments: Payment history is the most significant factor affecting your credit score. Ensure all current EMIs, utility bills, and credit card payments are made on time. Set up auto-debit instructions or reminders via banking apps to avoid missing due dates.
Avoid Applying for Multiple Loans or Cards: Each loan or credit card application triggers a hard inquiry, which temporarily lowers your credit score. As lenders are cautious about lending to those with defaults, multiple rejections can worsen your situation.
Space out new loan applications and only apply for credit you’re likely to qualify for, such as secured cards or loans against assets.
To conclude, by assessing your credit report, settling dues, budgeting wisely and using secured credit responsibly, you can rebuild your credit score. It is important to stay disciplined and monitor your progress. If required, you can also seek professional advice.
. Read more on Personal Finance by NDTV Profit.Defaulting on a loan can have a significantly negative impact on your credit score. Read MorePersonal Finance
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