If you’re struggling to make agreed credit or loan payments, you could be at risk of breaking the terms of your credit agreement or ‘defaulting’.
This can have a negative impact on your credit rating and limit your ability to get further credit.
However, before a default can officially be registered against you, your creditor (the individual or business you owe money to) must send you a default notice to give you an opportunity to make up for missed payments and avoid legal action.
How does a default notice work?
When a creditor serves you with a default notice, you will receive a formal letter informing you that you are behind on your payments and your account is at risk of defaulting.
For debts regulated by the Consumer Credit Act (1974), your creditor is legally obliged to send you a default notice before starting legal proceedings against you to recover the amount owed.
Most creditors will issue a default notice after six months of missed payments, but this timeframe can differ depending on the individual circumstances.
What information should be included in a default notice?
When you receive a default notice, it should include the following information:
- Your name and address
- The name and address of the creditor issuing the default notice
- The type of agreement
- How the agreement was broken
- The action you need to take
- The action that will be taken if you don’t comply
What debts to default notices apply to?
Default notices apply to debts regulated by the Consumer Credit Act (1974), including:
- Personal loans
- Hire purchase agreements
- Payday loans
- Credit cards
- Store cards
What should I do if I get a default notice?
Once you receive a default notice, you will be given a minimum of 14 days to make up for the missed payments before your account defaults.
Paying the full amount owed within this timeframe will prevent your creditor from taking any legal action against you.
However, if you can’t afford to pay the full amount within the specified period, you must seek debt advice and contact your creditor to arrange an affordable repayment plan as soon as possible.
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What happens if I ignore default notice?
Failure to make up for missing payments or set up an affordable repayment plan within 14 days of receiving a notice of default will result in your credit agreement being terminated.
When this happens, a default will be registered on your credit file and your creditor will be given the right to demand early repayment of the full amount owed.
This could result in your creditor taking court action against you and potentially issuing a County Court Judgment (CCJ) to repay the outstanding balance in full or in regular instalments.
Alternatively, they may instruct debt collectors or a debt collection agency to recover the amount owed or repossess the item the finance agreement related to, such as a car or appliance. When debt collectors pursue a debt, the amount owed must be made to the debt collector rather than the original creditor.
Both of these options can have a negative impact on your mental and physical health and lower your credit rating, preventing you from being able to borrow more money or qualify for a mortgage or phone contract down the line.
How will a default notice affect my credit score?
When you receive a default, it will be noted on your credit report for a total of six years – even if you repay the full amount during this time.
This will make it difficult to access a wide range of credit products, including a bank account, credit card, or mortgage.
Even a mobile phone contract can be difficult to obtain with a default on your credit file.
Some creditors may be willing to give you credit, but with a higher rate of interest.
However, the good news is, once a default has been removed from your credit file, your creditor won’t be able to re-register it, even if you still owe the full amount.
Once six years have passed, the default will be removed from your credit file regardless of whether or not the debt has been repaid.
Can I stop a default notice?
Once a default has been issued, there is nothing you can do to stop it from progressing or remove it from your credit file until six years has elapsed, even if you’ve repaid the full amount.
However, if the default was issued in error or you’ve already paid the full amount, you have a right to request that it is removed from your account.
Alternatively, you can ask for a default to be removed if you’ve only missed between three and six months of payments.
For example, if you’ve only missed two monthly payments, you have the right to ask your creditor to remove the default from your account.
To do this, contact your creditor with proof that the default has been paid or issued incorrectly.
If your creditor still refuses to remove a default issued in error, you can seek further debt advice from the Financial Ombudsman, which has the power to remove all evidence of a default from your credit file.
Furthermore, if you’ve defaulted on a credit agreement that was later deemed to be unaffordable, you may be able to get it revoked if you can prove it shouldn’t have been issued in the first place.
How can I improve my credit score after a default?
There is very little you can do to stop a default from appearing on your credit file and lowering your credit score.
However, there are some steps you can take to offset the negative impact of a default on your credit score, including:
Staying on top of payments
Ensuring your creditors are paid in full and on time can give your credit score a much-needed boost after a default.
Always seek expert help and advice if you’re struggling to stay on top of your payments.
Registering to vote
Registering to vote at your current address can confirm your address and increase your credit score.
The longer you’re registered on the electoral roll, the more you can improve your credit score.
Avoiding further credit agreements
After a default, you must avoid further credit agreements wherever possible by paying for products and services upfront.
Making multiple applications for credit after you’ve been turned down can also cause further damage to your credit score and make it difficult to get your finances back on track.
