Credit score is an important factor that lenders consider at the time of approving your credit application. A disciplined credit behaviour enables you to maintain a high credit score, which in turn helps in getting credit applications approved without much difficulty. A default in your credit report can reduce your credit score and severely impact your creditworthiness. Staying informed about defaults in a credit report can help in mitigating them and remaining eligible for the best loan and credit card offers.
5 Most Common Defaults in a Credit Report
Listed below are the most common defaults that can be seen in a credit report:
DPD or Late Payments
DPD or days past due indicate any late repayment. Defaulting on repayments regularly can impact your credit score significantly, and major lenders might refrain from approving your loan applications.
Every missed or delayed payment is mentioned in the DPD chart, and it remains in your credit report for 36 months. The lender marks the loan account as NPA if there is a delay of more than 90 days in making the repayment. This damages your credit score to such an extent that you will find it almost next to impossible to get any new credit. When you start repaying your dues, your credit score starts showing improvement.
Read in Detail: Know about DPD or Days Past Due
Default Accounts (NPAs)
Lenders mark loan and credit card accounts as NPA that haven’t been repaid, and there are no chances of recovering losses. A borrower with a default account status in his credit report may not be eligible for credit at all. The credit score will remain poor as no lender would trust the borrower because the risk of offering credit is very high in such cases.
If you have a default on your credit report, try to at least settle the loan account. Even though settling is not a good option, it is better than default, and, in times of crisis, some lenders might still approve your loan application provided you show disciplined credit behaviour after settling your account.
Settled Account
When you miss your repayments for a long time and the lender senses no recovery due to your dire financial situation, they may offer to settle the credit account at an amount lower than the total due amount. The lender recovers some of its losses, and the borrower gets to settle the credit and move ahead through settlement.
This might sound like a win-win situation for both, however, this is not the case. The lending institution has to bear some losses against its investment in the borrower. Thus, settling an account is taken negatively by bureaus, and the borrower can witness a downfall in the credit score for a long time.
Suggested Reads: Why should you not Settle a Credit Account
Written-off Account
A written-off account refers to a loan or credit card account that a lender classifies as a loss because the borrower has not repaid the dues for a long time, typically 180 days or more.
This doesn’t mean the debt is waived. The lender stops pursuing regular recovery efforts and may report the account as “written off” to credit bureaus. This can severely damage the borrower’s credit score and reduce their creditworthiness.
Wilful Default Account
Such accounts where the borrower has the ability to repay the pending dues but chooses not to repay willfully. This comes under gross financial misconduct, and the borrower’s credentials are added to the Wilful Defaulter’s List maintained by the RBI.
The addition of the borrower’s name to this list invites legal action and may also lead to asset seizure. In many cases, the borrower is barred from raising funds in future. This is the worst kind of default account, where the borrower’s credit score takes a huge dip and there are next to no chances of improvement.
It is worth noting that you should avoid any type of default, as any default can impact your credit approval chances in future. Most of the defaults will make you ineligible for loans altogether. It is suggested that you pay all your dues on time and prevent any defaults to maintain a high credit score.
