Taking a personal loan has become very easy these days. You do not even need to keep any collateral for this. But, if you default in repaying the amount of your loan, then its effect can remain on your credit report for a long time! These reports are prepared by the country’s leading credit bureaus companies like TransUnion CIBIL, CRIF High Mark, Equifax, and Experian. Credit bureau companies keep a record of such defaults in their database for 7 years from the date of the first default.
When you apply for a new personal loan, credit card, or home loan during this period, the information about the previous default is revealed to the bank or financial institution. This puts the loan application at risk of being rejected, and even if the loan is approved, the interest rate can be quite high. This article will tell you how loan default damages your credit score, and what steps you can take to reduce this damage.
Direct effect of default on credit
The mark of default on the credit report directly affects the credit score. Even if you repay the outstanding amount later, the record of default recorded on the report remains in its place! This involves the credit rating in the long run.
According to financial experts, this may not only lead to your loan being rejected, but the customer may also have to be in a position to provide additional documents or security guarantees for any credit facility in the future. This shows that loan default can become a major obstacle in your financial journey.
How to reduce the impact of loan default
Financial experts advise adopting financial discipline in such a situation. You must pay all future installments on time. If possible, you can also make arrangements to repay the loan before it becomes due.
Early payment of the outstanding amount
Get a no-dues certificate: After the full payment is made, it is important to get a no-dues certificate from the lender. This is a crucial document that proves that you have repaid your dues.
Review the credit report: Identify any discrepancy in the credit report in time and file a complaint for correction. Sometimes the mistakes can be from the bureau’s side as well.
Avoid more loan applications: Many loan applications in a short period lead to ‘hard inquiries’, which further damages the score.
Use of secured credit products: Taking FD-based credit cards or small loans and paying them on time helps in building a positive credit history.
By adopting these measures, you can significantly reduce the negative impact of default on your credit score.
What is RBI’s rule in this regard
The banking regulator RBI has directed all banks, NBFCs, and asset reconstruction companies to ensure transparency and uniformity in the credit reporting process. Under this, emphasis has been laid on avoiding incorrect information in reporting and protecting consumer rights.
Financial experts say that although the record of default remains in the report for 7 years, if a borrower adopts regular and responsible financial behaviour during this period, its effect can be reduced over time. Habits like timely payment, balanced use of credit cards, and limited loan applications help in improving the score.