Juggling multiple financial obligations can be stressful, but missing payments can lead to a default, which can cause further financial pressure and potentially legal action.
Having a default can also have a negative impact on your credit file, which can make it difficult to get approved for most credit products, such as a mortgage, loan, bank account, or phone contract.
What is a default?
A default is a negative marker that might be added to your credit report if you miss agreed-upon payments on a debt and the lender has closed your account because they don’t believe they will ever receive payment.
There is no minimum number of payments you need to miss for a default to be issued against you. It is up to each individual creditor when to issue a default. Most defaults occur after three to six payment reminders, but this can vary depending on the lender’s terms.
Before a default is issued, you will be served with a default notice. This is a formal letter from your creditor asking you to make up for missed payments before a default is officially issued against you. In most cases, the time between a default notice and a default is around 14 days.
It’s important to note that you still owe money to the creditor after a debt defaults, so you shouldn’t ignore it. This will only lead to further action and, in some cases, court action.
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How do I know if I’ve got a default?
It’s important to know whether you have an active default on your credit record because it can stop you from being approved for credit and subject you to higher interest rates. Not knowing whether you’ve got a default can be stressful, but there is a quick and easy way to find out.
Firstly, checking your credit file will tell you whether you have been issued with a default within the last six years. Your credit file can be accessed through any of the three main credit reference agencies in the UK (Equifax, TransUnion, and Expedia).
Remember, you will always receive a default notice before your account is officially closed. Therefore, if a default notice was sent to your address over 14 days ago and you haven’t responded to it or made a payment towards the debt, your account will likely have defaulted.
How long does a default stay on your credit file?
For most debts, a default will stay on your credit file for a six-year period from the original default date. It will remain visible for six years regardless of whether it has been paid partially, fully, or not at all, so it’s important to pay it off if you can after receiving a default notice.
Once six years have passed and a default has been automatically removed from your credit file, it can’t be re-registered by your original lender, even if you still owe the money. However, your creditor will be free to take further legal action against you over the debt, such as issuing a County Court Judgment (CCJ).
Your creditor might also choose to sell your debt to a debt collection agency or debt collector after issuing you with a default, but this should be clearly stated on your credit report to prevent it from looking like you have two separate defaults. If this happens, the date the default was registered and the total outstanding debt shouldn’t change.
How will a default affect my credit score?
Receiving a default notice can have a negative impact on your credit rating, especially if it progresses to a default. Having multiple defaults will increase the impact on your credit score.
Future lenders will perform credit checks on you when deciding whether to approve your credit application. If you have a default on your credit file, it means you have failed to stick to the terms of a previous credit agreement and you could be at risk of repeating the same behaviour if you borrow money again.
There is no way of telling how many points your credit score will drop when you receive a default. The full effect of a default depends on several factors, such as what your credit score was before the default, how many missed payments you have, and how recent the missed payments were.
Generally, your credit score will continue to drop the most in the first 12 months, but the impact will lessen as the default ages.
Paying off a default after it has been issued won’t succeed in getting it removed from your credit report, but it will show lenders that you have settled the debt, which can make them view you as less of a risk.
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Will lenders know about a default after it’s been removed from my credit report?
Once a default has been removed from your credit report, lenders technically won’t know that you ever had one.
However, if you apply for credit, such as a payday loan or mortgage, they might ask you if you’ve ever defaulted on a debt. In this instance, you must be open and honest and explain the reason for the default. This shouldn’t affect your chances of being approved for credit, but it can help the lender better understand your credit history.
Furthermore, if the debt was sold to a collection agency after it was defaulted, this information might still be visible on your credit report when you apply for credit.
If it’s been more than six years since the default was issued, it can be useful to check your credit report with all three credit agencies to ensure it has been removed.
Can I get a default removed from my credit report?
If a default was recorded correctly on your credit file, it typically can’t be removed for six years, even if the debt is repaid within this time.
However, you might be able to get a default removed from your credit profile if you can prove that it was issued in error.
Receiving a default in error is rare, but it can happen. Checking your credit report on a regular basis can help you ensure everything is as it should be and there is nothing unfairly dragging your credit score down.
If you do notice a default and you’re confident it’s a mistake, you must contact the relevant credit reference agency with proof that the debt has been dealt with and make a credit report dispute for it to be removed as soon as possible. During this time, a notice of correction may be added to your credit file to let lenders know that the entry is currently under investigation.
You can also contact the lender to inform them of the issue. If the lender decides that the default was given in error, it should be removed from your credit file.
You can prove you shouldn’t have a default by providing bank statements showing that the debt has already been dealt with or evidence that the default is meant for someone else.
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How can I improve my credit score after a default?
Living with a default can negatively impact your credit score for up to six years. After this time, you should take steps to improve your credit score and demonstrate responsible financial behaviour.
It’s important to note that your credit score won’t instantly improve after a default is removed from your credit reports. It can take some time and hard work to get your credit score back to what it was before the missed payments.
Register at your current address
Some lenders check the electoral roll to confirm a borrower’s identity. If you haven’t already, registering at your current address can boost your credit score by proving you live at the address on your credit application and you’re not attempting to commit identity theft or fraud.
Make regular payments in full and on time
The easiest way to improve your credit score after a default is to maintain a positive payment history on your other credit agreements. Missed payments can stay on your credit file for up to six years and further harm your already-low credit score, even if you don’t end up with a default.
Keep your credit utilisation low
Only spending a percentage of your credit limit each month can help you boost your credit score. Most lenders prefer that your credit utilisation is 30% or less if they are going to enter into a credit agreement with you. This shows that you’re using credit responsibly.
Manage other debts
If you have any other debts in addition to the defaulted debt, it’s crucial that you keep up with your payments on them or enter into a debt solution to deal with them. Similarly, it’s recommended not to take out further credit unless absolutely necessary.
Can I reduce the impact of a default on my credit score?
There may be some things you can do to reduce the impact of a default on your credit score.
For example, if you’re in a position to pay off the debt in full, it’s recommended to do so as soon as possible. This will get the default marked as ‘satisfied’ on your credit file and lenders will know that despite the default, you eventually repaid the debt.
Alternatively, if there was a specific reason you defaulted (e.g. a serious illness or a job loss), you may be able to add a note to your credit file to let lenders know that the missed payments were out of your control.
Can I get a mortgage with a default?
Getting approved for any type of credit is difficult with a default, especially a long-term financial commitment like a mortgage. This is because a default is proof that you missed monthly payments on a former payment plan and you failed to make up the money owed.
Most lenders recommend waiting until the default has been removed from your credit file before attempting to get a mortgage because a rejected mortgage application will harm your credit score even more.
However, if you can’t wait until the default has been removed to get a mortgage, you might have more luck with a specialist lender. These kinds of lenders specialise in flexible mortgages for individuals who have poor credit scores, usually due to past financial problems and debt.
It’s worth noting that specialist lenders tend to offer less competitive rates and higher interest rates because you will represent a higher risk. This will help them recover more of the money in the event you stop making regular repayments.
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How can I avoid a default?
There are many things you can do to avoid a defaulted debt. Here are some of your options:
Build an emergency fund
Having money set aside for periods of financial difficulty can be the difference between you repaying your missed payments and getting a default. Even if you’re only able to save a small amount each month, every little helps.
Contact the lender
You should contact your lender as soon as possible if you’re struggling with making payments on a credit agreement. The sooner you reach out and explain your financial situation, the sooner you might be able to come to an arrangement and avoid further legal action, including a default.
Consider a debt solution
Entering into a debt solution to repay the debt in a way that’s more manageable for you can help you avoid a default. Depending on your circumstances, you could qualify for an Individual Voluntary Arrangement (IVA) or a Debt Management Plan (DMP) to repay your debt in monthly repayments. Free independent advice services can help you find the best option for you.
Conclusion
Getting a default means the lender has decided you owe them money, but you will be given multiple opportunities to repay the debt before your account is closed. There are many steps you can take to inform the lender of any financial difficulties you are facing before a default is issued.
Once a default has been issued, it will remain visible on your credit report for six years. During this time, you will find it difficult to access most forms of credit, including a personal loan, bank account, mobile phone contract, car finance, and a mortgage.
Paying off the debt and taking steps to improve your credit score after a default can help you get your finances back on track. Seek free independent advice to find out how to navigate a default and work towards a healthier financial future.
