What is a default on a credit report?

A default is a negative payment marker on a credit report. You’ll find one if several consecutive monthly repayments have been missed and the lender believes the contract has been broken. Because of this, defaults are one the most undesirable pieces of negative information you can have on your file.

If you already have a default or you’ve been sent a notice of default by post, don’t panic. Here, we’re looking at defaults in detail. We’ll cover what happens before you get one, the negative impact it can have on your credit report, and steps you might be able to take to improve your credit report in the months and years after a default.

What is a default?

A default on a credit report shows that someone didn’t pay back the money they borrowed on the schedule they agreed to with their creditor. It’s more serious than a late or missed payment because it shows that the problem has stretched over a longer period.

Defaults also signal that the relationship between the lender and the borrower has broken down – the lender no longer sees them as a customer behind on their payments but as a debtor.

This means there’s a fixed sequence of notifications before a default appears on your report, and you should never get a default without warning.

What happens before you get a default on your credit report?

Lenders take several measures before they apply to have a debt marked as defaulted.

• First, reminder letters. A lender usually contacts a borrower in writing when they miss a payment.

• Next, an official notice of default. A lender sends a formal letter stating their intention to report the default and giving the borrower a deadline. They’re legally required to give at least 14 days to pay.

• Finally, the default is added to the credit file. If the borrower still doesn’t make the repayment or if the lender doesn’t agree to a repayment plan, the lender can report the default and take action to reclaim the money through the courts or debt collectors.

There’s no official number of payment reminders that a lender has to send before they can proceed with a default. Some lenders may send the notice after six months of missed payments. With others, it might be less.

Most importantly, if you can repay the money or agree on a payment plan with your lender within 14 days of the default notice, you can stop the default from being added to your credit report.

How to recognise a default notice

A default notice is a letter with two bold messages at the top of the first page:

• “Important you should read this carefully”

• “Default notice served under section 87(1) Consumer Credit Act 1974”

The letter will likely also include an information sheet from the Financial Conduct Authority explaining your rights and giving the contact details of charities that can provide free debt help.

The letter will tell you how much you need to pay and give you a deadline for making the payment. Remember, the lender must give you 14 days to pay the full amount. If you won’t be able to do this, you can contact them and try to arrange a repayment schedule, but the lender does not have to agree to this.

How can a default affect your credit report?

A default is one of several negative payment markers that can appear on a credit report. These are:

• Numbers 1–6 show the months of consecutive missed payments (e.g., ‘4’ shows a customer who is, or was, four months in arrears).

• AR (which stands for ‘arrangement to pay’) shows that a customer requested to pay back less than the original credit agreement stated.

• D for default shows the agreement between the borrower and the lender has broken down, and the debt was not repaid in time.

Any of these negative payment markers has the potential to lower your credit score (which is calculated from the information on your credit report). Lenders will also be able to see them, and they’ll take them into account when you make a formal application for new credit, such as a credit card, phone contract, loan, or mortgage.

Defaults signal that someone had trouble keeping up with their monthly repayments in the past. To lenders, this makes the applicant more of a risk.

What happens if you have a default on your credit report?

If you have a default on your credit report, you might find:

• It’s harder to get approved for new credit agreements. Some lenders may refuse to consider your application at all if you have a default, which leaves you with fewer options.

• You can’t borrow as much money as you’d like. Lenders might only let you borrow up to a certain amount, leaving you to finance more of the purchase yourself.

• You can’t get the most competitive deals. Lenders might ask you to pay a higher deposit on your mortgage or pay a higher interest rate as part of the credit agreement.

• You may find it harder to get a job in finance. Although employers can’t generally view the information in your credit report, institutions like banks or accountancy firms will sometimes check someone’s credit history before they hire them because of the nature of the work.

It’s also important to know that if you don’t pay the defaulted debt, the impact on your credit report can keep getting worse.

For example, the lender might follow the default notice with a letter of claim, which tells you they intend to pursue the money through the courts. If the lender issues a County Court Judgment (CCJ) against you, you’ll have a further serious marker on your credit report, which can make it even harder to get new credit.

What’s more, markers like CCJs and personal insolvencies are visible on the public record. This means they can be seen by people like landlords or employers when you give them permission to run a background check as part of your application.

This is why it’s best to do everything you can to pay the debt within 14 days of the notice of default, so you can avoid the default and the further consequences it could have.

How long do defaults stay on your credit report?

Like all payment markers, defaults stay on a credit report for six years. During this time, the default will be visible to lenders when they check your report (e.g., as part of your application for a new credit card).

If you pay off the default in full, the entry on your credit report will change to show that the default is ‘Satisfied.’ Satisfied defaults still appear on your credit report until the end of the six-year reporting period, but this change can help to show you are less of a risk to lenders.

After six years, the default is removed from your credit report completely, and it will no longer affect your credit score or your applications for new credit.

Important note: The information in your credit report is not updated in real time. For example, most lenders and credit providers report new payment information to credit reference agencies on a monthly cycle. This means it may take a further month for a default to leave your credit report after the six-year period ends.

There’s a default on my credit report. What can I do?

It’s important not to underestimate the severity of a default. However, if you have one on your credit report, there are still things you can do to improve your financial situation.

If you believe the default is a mistake, you can dispute it. For example, if your bank statement shows you paid the amount you owed within the 14 days of the default notice, but the marker was added anyway, you should be able to have it removed. Get in touch with our customer care team who can guide you through the process.

If the default is accurate, you still have options:

• Build up a positive repayment history for your other debts. Making consistent monthly repayments on your other accounts will build up positive payment markers. This can put you in a stronger position when the default is removed.

• Take other steps to improve your credit score. Avoid further damage to your credit report by limiting the number of new credit applications you make and keeping your address and personal information up to date with your lenders and the Electoral Roll office.

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To recap:

Defaults on a credit report show a customer hasn’t kept up with their repayments, usually for an extended period of time.

To existing lenders, defaults show the relationship with the customer has broken down, and they may consider other ways of reclaiming the debt. Meanwhile, new creditors can take defaults as a sign that it would be risky to lend to the applicant. And for borrowers, defaults can make it much harder to get new credit. For example, you may have to use a lender that specialises in customers with defaults and CCJs, which can mean you’re offered a higher interest rate and will repay more in the long term.

If you’ve just received a default notice, it’s vital to remember that you can avoid the default if you pay the amount in full within 14 days. If you already have a default, it will appear on your credit record for six years, but during that time, you can take steps to build a positive payment history and put yourself in a stronger financial position for when it’s removed.