default

For a bond, mortgage, auto loan, or other lending agreement, the borrower (“issuer,” in the case of a bond or other fixed-income security) is said to be “in default” if they fail to deliver a scheduled payment of interest and/or principal. It’s a major risk when investing in fixed-income securities. Retail banks and consumer lenders consider your credit score (seen as a way to gauge default risk) when deciding how to structure a mortgage or auto loan, or when setting the limit on a credit card.

Bond ratings agencies such as Fitch, Moody’s, and Standard & Poor’s (S&P) track bond issuers and bond risks. They assign ratings—letter grades from AAA (on solid footing) to D (in default)—to all sorts of bonds, including:

Default risk can never be eliminated, but many bond investors minimize that risk by investing only in bonds issued by institutions with high credit ratings. Even bonds backed by the U.S. Treasury are at risk of default, particularly when the nation approaches its current debt ceiling. Although the U.S. has never defaulted on its debt, there have been periods of enhanced risk.

In 2011, S&P issued a downgrade on U.S. sovereign debt—one notch, to AA+ from AAA—amid growing budget deficits and a debt-ceiling standoff. In 2023, Fitch issued the same downgrade (AA+ from AAA) on U.S. debt, citing an “unsustainable” fiscal path. Moody’s followed in 2025, lowering its rating to Aa1 from a gold-standard Aaa, citing rising federal deficits, political gridlock in Congress, and long-term fiscal challenges.

Corporate defaults frequently occur in conjunction with a bankruptcy, in which case common shares become worthless. Bondholders receive a percentage of the money they’re owed in interest and principal (what’s known in bond lingo as a “haircut”).

Defaults occur more frequently among corporations with lower credit ratings. Bonds rated below BBB- by S&P (or Baa for Moody’s) are considered speculative grade (aka “high-yield” or “junk” bonds) and carry a higher risk of default. Some bond issuers subject bondholders to indenture agreements, which are written promises between bond issuers and holders that outline any supplementary commitments on behalf of the bond issuer in addition to the timely payment of the principal and interest. Violations of indenture agreements may cause the bonds to default.

At the consumer level, the type of debt you can access and how much you’ll pay for it—the interest rate—depends heavily on your credit score. A lower score means you’ll be limited in the types of debt you can qualify for, and you’ll generally pay higher interest rates.

Borrowing falls into two basic types: secured debt—backed by collateral that can be seized if you default—and unsecured, which isn’t tied to an asset and thus doesn’t require collateral. Unsecured debt is riskier for the lender, so it’s generally associated with higher interest rates. Mortgages and auto loans are secured; credit card debt is unsecured.

A default on a secured loan can cost you your collateral (e.g., you could lose your home in foreclosure or have your car repossessed). With an unsecured loan, nonpayment could end up in debt collection. Both types of default can destroy your credit score.