Credit Scores

• Debt affects credit scores in two major ways. The debt acquired from credit cards and loans lowers your FICO credit score because balances make up 30 percent of scores. What's more, when you skip or miss payments to your creditors and lenders, this information becomes a fixture on your credit report and can ruin your credit history. Defaulting stays on your record for seven years, and some creditors will not offer financing because of your bad payment record and history of default.
  
  

Judgment on Report

• Not only will you deal with late payment updates on your report, but if your lender or creditor sues, you can face a credit judgment along with the late payments. And if the creditor does not file a lawsuit, the company can report your name and account information to a collections department and list a collections account on your report. Collections and judgments remain on your credit history for seven years, and getting any type of future financing could call for satisfying these balances. Even if you pay the balance, the creditor or lender may attach a higher interest rate to your account.
  
  

Late Fees

• Negative information on your credit report is only one aspect of defaulting on debt. The financial consequences of default are often burdensome. Lenders and creditors raise your interest rate because of your poor payment record, which triggers a higher monthly payment. Creditors and lenders charge late fees, and interest can continually incur until you make a payment on the account.
  
  

Garnishments

• Some creditors and lenders write off or charge off unpaid accounts after several months and then slow down collection attempts or use a collection agency. An encounter with an obstinate creditor can lead to an ongoing debt collection battle. After acquiring a judgment, the creditor can go after your bank accounts or wages (with the court's permission) to collect on a delinquent balance.
  
  

Avoiding Default

• Taking on minimum debt and knowing what you can afford helps avoid default. Saving for purchases rather than pulling out credit cards helps keep debt low, and if you must use a credit card, resolve to pay the balance within a few days or weeks to avert high balances and lower the risk of default. Plus, talk to your creditors or lenders if you experience payment problems. Communication can trigger an adjustment in your due date or a temporary payment reduction or suspension.