How Does Defaulting Your Car Loan Affect Your Credit Score

Defaulting on car loans is a financially detrimental occurrence. While it is possible to recover from a default, a default is second only to bankruptcy in terms of errors you can make with your debt. When you default, that default is tracked on your credit score and viewed by other potential lenders according to our system of credit reporting.

How Credit is Tracked

There are three bureaus in the United States that receive and report information on your credit: Experian, Equifax and Transunion. Each bureau receives information from your lenders when you open a line of credit. The lender then reports how you handle that credit, including any made or missed payments and when the loan is paid off. Today, this is automated through the Internet. When you default on a loan, the lender will enter this information into the system, and the three bureaus will immediately begin reporting the default. 

What are Positive Credit Behaviors

The bureaus report all credit behavior, positive and negative. There are many examples of credit activities that positively affect your score. When you open a new line of credit or loan, the activity may be good for your credit. Lenders like to see that you have a mix of installment and revolving loans, and they like for you to carry some debt responsibly. Having a solid mix of debt on your record, therefore, is a good factor to your credit. Every time you make a payment, the action is recorded. The best action you can take is to pay off a loan on schedule. When you pay off a loan at the time it matures, not before or after, your credit score will increase.

What are Negative Credit Behaviors

If you have too many lines of credit, your credit score will begin to drop. The same is true for multiple inquiries into your credit. Carrying too high of balances on the debt you have will additionally lower your credit. There are a few events that qualify as detrimental to a credit score. One of these is late or missed payments. A second is default or foreclosure. If you default on a loan, you will have the default on your credit report for years depending on your state's statute of limitations. Future lenders will be wary of working with you. The larger the loan you default on, the bigger problems you will have on your credit score. Finally, entering bankruptcy is the worst activity you can have on your credit. 


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