Understanding the consequences of loan defaults on your credit score
Despite the best intentions and efforts, it can sometimes be challenging to stay on top of financial commitments, especially with the rising cost of living impacting many South African households.
Understanding loan defaults and credit scores
If circumstances arise where the scheduled payments of a loan, are missed, the loan may enter ‘default’ status. This not only impacts the customer’s loan with their lender but also has broader effects on their credit profile.
A high credit score signals to lenders that you are a responsible borrower, while a lower score can indicate a higher level of risk. Timeous loan repayments boost your score, but missed or defaulted payments can cause it to drop, sometimes significantly.
The impact of loan defaults on your financial journey
A loan default has more severe consequences on a credit score than a single missed payment. Here’s what typically happens:
- Credit reporting: When a loan defaults, credit providers notify the credit bureaus, which may affect your credit profile for up to five years. However, once the overdue amount is paid, the record will show as “paid” within seven days, improving your credit status over time.
- Creditworthiness: Credit scores are a primary way lenders assess a borrower’s creditworthiness. The higher the score, the more attractive your profile is to lenders. A lower score may result in credit approval at a higher cost or may prevent you from accessing credit altogether.
Proactively protecting your credit score
Regular on-time payments help build a strong credit score, while missed or defaulted payments can significantly lower it, affecting a borrower’s creditworthiness for years.
Information provided by Wesbank
