Get back on your feet after defaulting on payments

Usually, when you take out a home loan, you assume that you will meet the monthly instalments throughout the loan period. Unfortunately, it sometimes happens that your circumstances change, making repayments impossible.

If you default on repayments, your credit score will drop significantly. Fortunately, a default doesn’t mean you have to permanently give up on a good credit score – and future home ownership.

Check your score

The first step is to check your credit score, so you need to take time to visit the website one of the credit bureaus for a free full credit report. You will find your account payment history, balance, and instalments, as well as any adverse credit information. This will give you a clear picture of your credit position, highlighting which areas you need to work on to get yourself back to a good credit record.

Planning

The following steps will put you in the position to reclaim your good credit record and get back on your feet financially:

• Check for inaccuracies in the report. Incorrect information can be disputed and removed, which will instantly improve your credit score.
• Pay off the defaulted debt. This may temporarily worsen your credit score as you will have less money to service other debts. In the long run, though, it will prevent more adverse information on your record. In some cases, defaulting on a loan can still harm a credit report – even after bankruptcy. This can happen with debts such as student loans and child support. So, if you default, it’s still best to pay off the debt, even if you’re late.
• Create a more favourable debt-to-limit ratio by paying down debt overall. This is a great way to get a better credit record while getting rid of the debt that made you default in the first place. It can also help you get into better financial shape when it comes to savings.
• No matter how tempting it sounds, do not take out several small-limit credit cards. More credit cards in your name can give you a slightly higher credit score, because of the higher debt-to-limit ratio. But this only works if you can service the new debt, which you probably can’t at present.
• Consider getting professional help. A financial adviser should be able to offer guidelines for getting your finances back on track.
• Debt review should only be considered as a last resort. Going under debt review will negatively affect your credit profile. It will reduce your score with all the credit bureaus, and you cannot legally take on any new debt while under review.

Defaults are black marks on your credit score, but they are not as bad as judgments or bankruptcies. Rebuilding a good credit record after a default is possible, but it will take time. The key is to consistently work hard at it, be patient – and ask for help if you need it.