Credit report default status: How long does it stay and how can you remove it? | Mint

Financial hardships resulting from certain circumstances can put an individual in a spot of bother. It can result from job loss, accident, hospitalisation, financial mismanagement, etc. It can lead to the individual defaulting on their debt obligations. A default can ruin the individual’s credit report and stay there for a long time. In this article, we will understand what a debt default is, how long it stays on a credit report, its consequences, and how to remove it.

What is a debt default?

When an individual doesn’t pay their debt obligations by the due date, it is known as a debt default. It applies to loan EMIs, credit card outstanding, etc. If the payment is not made, it is reflected in the credit report under “Number of days past due”. For example, suppose the payment due date is 20th March, and the borrower has not paid till 31st March. In this case, the credit report will show 11 under “Number of days past due”.

If the debt amount remains overdue for more than 90 days, it will be classified as a non-performing asset (NPA). If the amount due remains an NPA for a period less than or equal to 12 months, it would be classified as ‘Sub-standard’. If the amount due remains a NPA for more than 12 months, it would be classified as ‘Doubtful’.

A difficult financial situation where an individual has run out of finances may leave one with no choice but to default. Financial hardship can result from an individual or a family member getting hospitalised and a huge bill, draining savings. It can also be a result of an individual losing their job. A person may lose their job if their company, sector, or overall economy is not doing well.

In the case of some individuals, the reason for financial hardship can be financial mismanagement, i.e. expenses are consistently higher than income, leading to reliance on credit cards or personal loans. The above are some situations that can lead to a person defaulting on their debt obligations.

How long does the default status appear in the credit report?

If the individual doesn’t pay their EMI or credit card outstanding by the due date, the bank will report it to the credit information companies (CICs) like CIBIL. The credit report will reflect the overdue amount, the number of days past due, etc. The credit report will also reflect whether the NPA status is sub-standard, doubtful, etc.

Once the bank reports a delay or a default to the CIC, it immediately leads to a big drop in the credit score. The default status stays on the credit report for up to seven years unless the borrower contacts the bank, repays and asks the bank to remove it. After the default, the credit score can take quite some time to recover.

How does the default status affect your chances of getting loans in future?

When the default status is reflected on the credit report, the borrower will find it challenging to get new loans or credit cards. Whenever a borrower applies for a new loan or credit card, the bank will do a hard enquiry on the credit report. On checking the credit report, if they see a default, they will consider the borrower profile risky and will likely reject the credit application.

The borrower may follow good credit practices for other loans/credit cards, and their credit score may recover over time. However, as long as there is a default on even a single loan or credit card, getting approval for new credit won’t be easy in spite of a decent credit score.

How to remove default status from the credit report?

Over time, most individuals emerge from the financial crisis. Once that happens, the individual must take steps to repay their debt obligations. If the individual has delayed, defaulted, or settled any bank loan or credit card dues, they must contact the bank to repay it.

As discussed earlier, the default status can stay on the credit report for up to seven years, making it difficult for the individual to get new credit. Hence, the borrower must contact the bank and initiate the process to repay the outstanding amount. Once you repay the outstanding amount with interest and penalties, if any, collect the ‘no objection certificate’ or ‘no dues certificate’ from the bank. On receiving the payment, the bank will report the same to the CIC.

The CIC will remove the default status in the credit report and change the loan/credit card status to close. It may take a few days for the status to get updated in the credit report. Once the credit report is updated, check and confirm the same.

How to avoid becoming a defaulter?

Sometimes, the situation can get really hard, pushing an individual towards a default. However, before deciding to default, the individual should explore all other options. Check with your employer if they can give you a salary advance or a fixed amount that they can deduct from your monthly salary in equal instalments over the next few months. You may seek financial assistance from family, relatives, friends, colleagues, etc.

You can approach the bank and explain your situation to them. The bank may take a considerate view and offer options like a moratorium on payments for some time or restructure the loan with a longer tenure, resulting in lower EMIs, etc. These are some of the options you can explore to repay the bank rather than defaulting on the debt obligation.

A default can ruin your credit profile

Financial hardships can push an individual to the brink of defaulting on debt obligations. However, a default has short and long-term consequences, impacting the individual’s credit worthiness. In the short term, there is a big fall in the credit score. If default status stays on the credit report for a long time, it will be challenging to get any new credit. Hence, an individual should take all possible steps to avoid a default by repaying their debt obligations.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.