How Bad Does a Credit Score Go If You Default on a Loan?

Defaulting on a loan is as bad as it gets in the lending industry, but with the release of a new version of the FICO scoring model in 2008, defaulting may not be as terrible for your score as in years past. Missing payments on a loan is usually the last option when you face a financial hardship. Most lenders will work with you to get you current on your account.

Identification

Missing a single payment puts your loan in default. A 30-day late payment hurts a score by 40 to 110 points, according to CNN. Expect damage in the higher end of this range if you have a score in the upper 700s and toward to the lower end for a score in the 600s. 90-day late payments cost up to 135 points and more if you cannot pay for 180 days.

Potential Effect

After 180 days the creditor must declare the loan a loss. He has two choices: try to collect the debt himself or sell it to a collector. In either case, the charge-off or collection accounts does even more damage. If you settle the account for less than the original balance, you just add another negative on top of that. How much damage this means nobody can say, because it depends on a host of other factors, such as any other delinquent accounts. Once you get to a debt settlement or charge-off, your score is probably already in the tank.

FICO 8 Changes

Lenders that use the latest FICO software as of 2011 -- FICO 08 -- will likely see a higher score for your credit report than a creditor that uses an older version. FICO 08 treats the occasional 30-day late payment less harshly than in previous years. You can probably regain the points lost on a short default within a year or two.

Preventing Default

Accept missing payments for a month or two only as a last resort and try to work with lenders the minute you feel you could miss a payment. The lender might allow you defer payments -- stopping payment for a few months with the agreement that you will pay a lump sum for all of the deferred months at the end of the agreement. Some creditors could even permanently lower your interest rate. This eases the strain of the monthly debt payment and saves your credit score.