How Do Defaults Affect Your Credit Score?

December 31, 2022

A default is applied to your credit file if you have missed payments, or have paid an insufficient amount. A creditor will normally apply a default after three to six months of missed payments, or payments which don’t cover the full amount owed.

Any payment regulated by the Consumer Credit Act is subject to default, such as utility bills, credit cards, and hire purchase agreements. Defaults are one of the most common reasons why people have a poor credit score.

Default notices

After three to six months of a customer failing to meet the terms of the credit agreement, the creditor will send a default notice. This is a letter which warns that the account is in arrears and requests that the missed payments are made in full within 14 days. The default notice will be sent regardless of the amount of money that is outstanding.

The letter will clearly state the following: ‘Default notice served under section 87(1) Consumer Credit Act 1974′. It will also state how much is outstanding and how long you have to repay the debt in full.

If you do not pay off the debt within two weeks, the creditor will record a default on the account, and may take further legal action to recover the debt. If you cannot afford to pay off the amount in full, the creditor may agree that you can pay it off in instalments. However, they may decide to cancel the credit agreement.

The debt may then be passed on to a debt collection agency, or the creditor may take court action, or repossess the goods in the case of a hire purchase agreement.

How does a default impact on your credit score?

If you make no attempt to repay a debt after receiving a default notice, a default will be recorded on your credit file. This means that credit reference agencies (CRAs) will update your credit score, and the information will stay on your file for the next six years.

When you apply for credit in the future, this may negatively impact on the outcome because lenders will view you as more of a risk to them. For example, you may find it difficult to be accepted for a car finance deal, a credit card, a mobile phone contract, or a personal loan.

A default may also affect your chances of getting a mortgage deal. It is still possible to get a deal, but you are advised to contact a mortgage broker for defaults, who will know which specialist lenders are most likely to accept your application.

Therefore, default notices should be taken seriously and dealt with as soon as possible. Sometimes, a lender may rate the default according to the type of default and the amount of money involved. Generally, defaults on mortgages and secured loans are viewed as the most serious, while phone and broadband contracts may be classed as less severe.

If you have a default, it’s still possible to rebuild a good credit history by arranging to pay all your bills and loans by direct debit, and taking care to live within your means.

Your home may be repossessed if you do not keep up with your mortgage repayments.

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