This article is designed to help those who have already received a default or are worried about the prospect of a default.
What is a default?
A default is a mark that may be added to your credit file by someone you owe money to if they have to close your account because you are unable to pay what you owe.
There is no fixed number of missed payments that trigger a default, but most lenders will issue a default after three to six months. There is also no specific debt limit that triggers a default, and your account can be closed whether you owe a few pounds or a few thousand pounds.
You can default on both secured and unsecured debts. Secured debts are debts that are tied to an asset and backed by some form of collateral, like your house or car, meaning you could lose your possessions if you fail to stick to the terms of the original agreement. Examples of secured debts include mortgages and car finance agreements.
Unsecured debts are debts that are not tied to a specific asset or property, which means they cannot be seized if you miss payments. Examples of unsecured debts include credit cards and bank overdrafts.
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Start my enquiryHow does a default work?
The process of receiving a default typically involves certain steps, depending on your circumstances.
For example, if the debt is regulated by the Consumer Credit Act (1974), your lender must legally send you a formal letter called a default notice and give you two weeks (14 days) to make up for the debt before they take further action.
If you fail to come to an agreement over how to deal with the late payments within this time, your lender will proceed to close the account. Once the account has defaulted, the debt will likely be passed to a debt collection agency to recover payment on their behalf.
Some of the companies that may issue a default against you include a bank, utility supplier, internet or mobile phone company, and a loan provider.
How long does a default stay on your credit file?
A default will stay on your credit file for six years from the date the account defaulted. During this time, your credit rating will be affected, and you'll find it difficult to borrow money or qualify for certain types of credit, including a personal loan, mortgage, or bank account, as it shows you've struggled to repay credit in the past.
Even if you're able to qualify for a loan with a default, you'll likely be subject to stricter terms and higher interest rates as a high-risk borrower to give your lender more protection in case you default.
It's important to know that, even if you pay off the debt at some point during these six years, the default will remain on your credit file. Its status will, however, be updated to 'satisfied' or 'paid' to let lenders know that you have since repaid the debt.
All defaults are automatically removed from your credit record after six years, without you needing to do anything. Over the course of these six years, the default will have less of a negative impact on your credit history. This means that a brand-new default will have a harsher impact on your credit history than an old default.
Remember, lenders are not legally required to report to all three credit reference agencies in the UK. As a result, a default may not be visible on all of your credit files.
Can I get a default removed from my credit file before six years?
Defaults usually cannot be removed before six years unless you can prove it was issued incorrectly or is a result of fraud. However, they cannot be removed simply by paying them off early, as is the case with a County Court Judgment (CCJ).
In other words, if a default was issued correctly, it will likely remain on your credit file for six years regardless of whether or not it has been paid. It may be marked as satisfied if you pay it off within this time, which may help your credit score recover and can be viewed more favourably by lenders if you were to apply for credit.
Some of the situations where you may be able to get a default reversed include:
- You didn't miss any payments
- The debt isn't yours to pay
- Someone else accrued the debt using your identity
- The default is still visible despite being issued more than six years ago
- You didn't receive a default notice or certain steps were missed during the process of issuing you with one
- The default contains incorrect information (e.g. the wrong debt level)
To challenge a default, you must contact the relevant credit reference agency to dispute the issue directly. They are required to investigate your complaint by contacting the original creditor to verify the information you have provided, and you may be asked to provide proof of the mistake.
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What happens if I ignore a default notice?
It can be tempting to ignore a default notice, but it's important to know that a defaulted debt doesn't mean it no longer exists. In fact, lenders may have greater powers to enforce a debt after it's been defaulted.
In most cases, your debt will be passed on or sold to a debt collection agency. They will then pursue the debt and potentially add extra fees and interest to your outstanding balance.
It's worth noting that while a lender has less time to chase debtors, the sole purpose of a debt collection agency is to recover unpaid debts. This means that they will likely contact you more frequently than your original creditor, and may even visit you if you continue to ignore their calls, letters, or emails.
If you're ready to deal with your debt after a debt collection company contacts you, it's important to negotiate a payment plan you can realistically afford. Offering to pay more in an attempt to stop them contacting you might sound like a good idea at the time, but you'll face further consequences if you can't pay what you promised.
Dealing with a debt collection agency can be stressful, but it can be avoided. Simply cooperating with your creditor when they first initiate default proceedings can prevent you from dealing with debt collectors and further legal claims down the line.
In rare cases, a creditor can petition for your bankruptcy if you continually ignore a default notice. However, this usually only happens if you owe more than £5,000 and have assets of significant value, such as a house or a car.
How can I avoid defaults?
Whether you've already received a default or you're struggling to pay debts, the best way to avoid defaults is to make your payments in full and on time and get in touch with your lender if you're worried you won't make your agreed payments for whatever reason.
Admitting that you need help with your payments can be daunting, but it's always better to take action before things escalate. For example, if you're struggling to pay your energy bills, you may not know that most utility suppliers have dedicated teams whose role is to help customers find a way to make their payments more manageable.
Some creditors will also be happy to implement a payment break, where you agree to pause or reduce your monthly payments for a specified period. This can give you the time you need to get back on your feet and avoid further action being taken against you while you're in financial hardship.
Most defaults occur after a few months of missed repayments, so it's important to take action before the debt escalates to this stage. If you're not sure what your next step should be, don't hesitate to get in touch for free debt advice.
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Conclusion
When a party defaults on a debt, it means they have failed to stick to the agreed terms of the agreement and the contract has been cancelled as a result. A default will be visible on your credit report for six years, so it will be apparent that you've struggled with debt when lenders check your credit history.
When a borrower defaults on a credit agreement, the debt may be passed on to a debt collection agency to recover on your original lender's behalf. This can incur further fees.
It's important to note that a default will not occur due to something as simple as missing a due date on a payment. Lenders will only issue a default if they've tried several other methods of recovering the debt.
