Every time you apply for credit, the prospective lender checks your credit report on file with one or all of the three major credit bureaus -- Equifax, Experian and TransUnion. If you have a default in your file, your chances of securing the funds you need are diminished. Lenders generally won't report a default to the credit bureaus until they've tried to work with you to resolve any problems, so having one on your file is a sign that you've either buried your head in the sand or made no effort to make payment. Neither of these traits are qualities lenders look for in the people to whom they lend money.
Time Frame
A default will stay on your credit file for seven years plus 180 days from the date your lender charges off -- or writes off -- your debt. Most lenders charge off delinquent debt once 180 days have passed without a payment being made. If you're in financial difficulties and missing payments but making some contribution to your debt, your lender likely will report late payments and the fact that you're in arrears to the credit bureaus.
Consequences
Having a default on your credit file will make it difficult for you to borrow money in the future. If your lender has issued a charge-off against you, other financial institutions will be able to see that you've made no effort to pay anything towards your debt for 180 days or more and allowed your account to default. The only credit you'll be able to secure with a live default on your file is likely to be at a high interest rate, according to the Federal Trade Commission.
Avoiding a Default
If you're experiencing financial difficulties and are having problems paying your debts, contact your creditors to ask if you can make alternate payment arrangements. Although this also may damage your credit score, it's not as bad as allowing your account to default.
How to Recover
After the charge-off has appeared on your file, if you pay the balance due to your lender or a collection agency that was trying to collect it, your credit report will be updated to show that the debt has been satisfied. The fact that you defaulted will remain visible to any institutions that check your file, but your report will reflect the fact that it's been settled. The only way to fully recover from a default is to wait until it's been removed from your file after seven years. Managing your other accounts well can help to repair the damage, but a default will adversely affect any application you make for credit until it drops from your report.
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