Let’s say you owe $1,500 on a personal loan or credit card and can see no way to pay it off. Maybe you lost your job, or maybe you’ve had an accident or a medical emergency. So the idea of defaulting on that debt could seem like a good idea.
What is a default?
A loan default is basically in the eyes of the beholder. It means that you simply are not meeting your responsibilities regarding a debt. This could be missing a payment, being late on a payment or just refusing to pay back the debt, which is what we’re talking about in this article.
Do you really want this on your record?
The biggest question you need to ask yourself before you walk away from a debt is do you really want this on your record? It will go in your credit report and will stay there for probably 10 years. Whenever you apply for credit of any kind, the lender will know you defaulted on a loan and categorize you as a bad risk. You may not be able to get any credit of any kind, including an auto loan and you may not even be able to rent an apartment or a house.
What happens to your credit score
Another question you should ask yourself is what will this do to your credit score? While it’s impossible to say how much it will affect it, the fact is that it will definitely have a negative impact. Suppose, for example, that your credit score was 605 and the default caused it to drop to 570. This would cause you to go from a “low credit score” to a “poor credit score”, which would likely result in everything from having to pay higher credit rates to higher insurance premiums.
Repairing that credit score
Unfortunately, it’s much more difficult to repair a credit score than to damage it. Once you’re rated as a low or poor credit score, it can take years to climb back up to a higher score. You might even have to start with a secured credit card as a way of rebuilding your credit. This where you deposit money to “secure” it. This is generally $300 or $500 or could be more if you have the money.
You can then use a secured card any place that accepts Visa cards or MasterCard just as if it were a regular credit card. The difference is that you will have a spending limit, which in most cases will be the same as your deposit. If you deposited $500, that will be your limit. You could charge up to that $500 in one month but you better not exceed it.
If you use the card prudently, meaning that you don’t exceed your spending limit and that you pay off your balance at the end of each month, this will be reported to the credit bureaus and will help your credit score. Use the card judiciously for a year and you’ll probably then be offered a regular card, which would help expand your credit record.
How will you feel about this in five years?
While this might seem like a good idea at the time, how will you feel about this five years from now? With a little bit more maturity comes a little bit more wisdom and with more wisdom, you might come to rue the day you decided to stiff that lender.
The alternatives
Before you default on a loan or credit card debt, you should explore the alternatives. There are ways to handle that debt that are at least relatively painless. You could go to a consumer credit counseling agency where you would be given a debt management plan that could help you become debt free in three to five years (depending on the size of your debt). Or you could let us settle your debts. Contact us today to learn more about debt settlement and what it could possibly do to help you become debt free and save thousands of dollars in the process.
