Delinquency vs Default: What’s the Difference?
When managing your finances, one of the most crucial aspects is the difference between a delinquent account and a defaulted one. Many people find themselves confused by these terms, yet knowing the distinction can make a significant difference in your financial health. Whether it’s a student loan, mortgage, or credit card payment, missing a due date can have varying consequences depending on how quickly you act.
In this post, we’ll break down what delinquent accounts are, the potential consequences of falling behind on payments, and the steps you can take if you find yourself in this situation. By understanding these key concepts, you’ll be better equipped to manage your accounts, protect your credit score, and avoid the pitfalls of delinquency and default. Let’s dive in.
What are Delinquent Accounts?
A delinquency account has passed its due date for a single scheduled payment. This payment could be anything from repaying student finance, a mortgage or a personal loan. Depending on the lender, the due date will be 25 – 30 days after the closing date. For instance, if your due date is the 10th of each month and you don’t pay it until the 26th, your account will be considered delinquent. While creditors won’t report you to credit bureaus immediately, you may still be charged a late payment fee, even if your payment is just one day past the due date.
Depending on your agreement with your lender, you may be eligible for a grace period. A grace period typically lasts 21 days, allowing you more time to pay without accruing interest if you miss your initial due date. However, not all lenders offer grace periods, so it’s important to check beforehand. If you don’t have a grace period, you can still bring your account current and request that your lender reverse the fee. Be mindful that this is usually a one-time courtesy offered to those who consistently make their payments on time each month.
What are Delinquent Accounts?
On the other hand, if payments are missed over an extended period, your loan may go into default. The point at which your account can default varies depending on the lender. Even just one day late for a credit card repayment can result in your account going into default. Whereas a mortgage repayment can be delinquent for 90 days before going into default.
Related: What Credit Score Do You Need for A Mortgage?
What Are the Consequences of Delinquent and Defaulted Accounts?
Delinquency is usually resolved by paying off the overdue amount and any additional fees, allowing you to resume regular payments without falling further behind. However, if you default on your loan, it can be challenging to recover, as the entire balance will become due immediately.
Delinquency can damage your credit score, but a default account has a more severe impact. Having a default account can make it difficult to get a mortgage or rent a property in the present and future. As your credit has been negatively impacted, you may find it hard to borrow money in future too.
Related: Surprise Factors That Could Affect Your Credit Rating
How Long Do Late Payments Remain on Your Credit Report?
Whether your account is open or closed, a late payment will remain on your credit report for seven years from the original delinquency date. The impact of late payments on your credit score typically decreases over time; however, you still need to pay them to avoid debt collectors.
Steps to Take if You Have Delinquent or Defaulted Accounts
If your account is delinquent or in default, it’s important to address the issues promptly to prevent falling further behind.
- Bring your account current: If your payment was missed due to reasons that aren’t your fault, bring your account current to see if you can be refunded by your lender.
- Get in touch with your lender: Contact your lender straightaway if you’re aware that you may miss a payment. Your borrower can then prevent your account from becoming delinquent by lowering the minimum payment.
- Reach out to a credit counsellor: Having guidance from a credit counsellor can help you set up a budget to easily pay off your late payments.
Managing your financial obligations is essential to maintaining a healthy credit score and avoiding the serious consequences of delinquent and defaulted accounts. Understanding the difference between these terms can empower you to take timely action, whether catching up on a late payment, reaching out to your lender for assistance, or seeking guidance from a credit counsellor.
Looking for more ways to manage your finances effectively? Check out our blog post Smart Cuts To Reduce Your Expenses for practical strategies that can help you save money and stay on top of your payments. Start making smarter financial decisions today!
