24 Jan 2020

What are defaults?

The world of finance can sometimes be a confusing and complicated one. If you have a bank account, credit card or any other kind of financial product, you’re likely to come across a lot of jargon. In order to minimise risk and keep your finances healthy, it’s important that you understand these key but sometimes confusing terms.

One word you may have encountered is ‘default’. A default occurs following a missed payment on a loan or other form of credit. So, it’s possible to default on a loan by missing a repayment deadline, or fail to make a monthly mortgage payment.

A default takes place when the lender decides to close your account because of the missed or late payment. You may end up with a default over a very small payment, or one covering hundreds or even thousands of pounds.

A default doesn’t happen overnight. The lender must send a formal letter of notice called a ‘default notice’. This explains the situation and gives you a chance to make the missed payment before your account is defaulted and closed. The lender must give you a minimum of 28 days to make up the payments you have missed. It’s important to note that you will very rarely be required to repay the full outstanding balance to stop your account being closed, you will only need to make up any missed payments. In the case of a credit card, this may mean that you only need to make up the minimum payments, which could be as little as £5 per month. If you can afford to catch up on payments, its a smart idea to do so as this will be your final opportunity to stop the default.

But how can defaults affect your long-term financial health, and your future? Let’s take a look at how defaults affect your credit report and what to do if you default on a payment.

What is a default on your credit report?

Your credit report is a detailed log of your financial activities over a certain time period. It includes everything from credit cards and mortgages to utilities and mobile phone contracts. Unfortunately, it also includes things like defaults.

Defaults show up as red flags on your credit report. They say loud and clear to lenders that you weren’t able to keep up with your agreed repayment plan to repay what you owed, to the point that the account had to be closed.

Defaults on your credit report can significantly lower your credit score. This can make it very tough for you to get credit in the future – although it isn’t impossible. If you’re planning to buy a house or get a credit card at some point soon, you may find yourself limited to options for people with a poor credit history. However, these products often offer unfavourable terms, such as low borrowing limits and high interest rates. Ultimately, it’s best to avoid default situations altogether if you can.

How long do defaults stay on credit reports?

While it’s still possible to get credit after a default has dragged down your credit score, it can be very difficult. But there is some good news, as the default doesn’t stay on your credit file forever. In fact, it’ll be removed six years after the date of default, whether or not you’ve repaid or you still owe money. This will give you a clean slate to start building your credit score back up.

You should always continue to make repayments after the six year limit has passed, because lenders could pursue a CCJ against you if you stop. However, you’ll have the peace of mind knowing that the default is gone and your credit score can only improve.

How to clear defaults on your credit report

Unless a mistake has been made, it’s not possible to have a default removed from your credit report. If you suspect there has been an error, contact the lender right away or seek expert advice.

Otherwise, you’ll simply have to wait until the six years are up. But there are still things you can do to reduce the damage a default can do to your credit score. You can also take other measures to improve your credit score in other ways. This can balance out the dip in your score caused by the default.

Follow these steps:

  • Try to repay the debt from the default as soon as you can. It looks so much better on your credit report if an outstanding debt is marked ‘satisfied’. The default will still be there, but the message to future lenders is that you can eventually be trusted to cover repayments.
  • If you had particular circumstances which caused you to default on a loan or repayment, this could make a difference. For example, if you lost your job, became ill, lost a close relative or had to care for a loved one. You can try explaining these circumstances to the lender or to a credit reporting agency. This note can potentially be added to your file, explaining why you fell behind on payments.
  • Start to grow your credit score by making all other payments on time and use as little as your credit limit as possible. Experts recommend keeping credit utilisation at around 25% at most, which would be around £500 of a £2,000 limit.
  • Make sure you’ve done the basics, such as registering on the electoral roll. Close any unused credit cards, as having too many can suggest that you’re too dependent on borrowing.