In this brief guide, we are going to discuss how a default on your credit file affects you.

What is a default?

A default is when you have a credit account in arrears for a long time (usually between 3 and 6 months) and the credit provider has tried severally to bring your account up to date but has failed and hence issues you with a default notice.

A default notice can be issued to credit regulated by the consumer credit act 1974. It can also be issued for goods which are not regulated under the consumer credit act but it is not a legal requirement to do so in this case.

Once a default notice is issued this means the credit provider sees no need int trying to pursue you for the lost funds and has given up. A default notice will be marked on your credit file and will stay there for 6 years.

After receiving a default notice, the debtor has 14 days to pay the amount owed, either in one lump sum or instalments, otherwise a Default will be registered on their credit file.

In the second instance, for credit agreements that are not regulated under the act, (e.g. mortgages) a default on a credit file simply reflects the fact that the lender considers the relationship between itself and a borrower to have broken down.

What is a default notice?

A default notice is an official letter which a creditor who issues credit under the consumer credit act 1974 will send to you once they have put your account in default. You will usually have 14 days to bring your account up to date.

A default notice will usually contain:

  • The reason why your account is going in default
  • The amount you need to pay to bring your account up to date and how to pay( it must allow you 14 days to bring your account up to date)
  • Details of your original credit agreement
  • The terms of the original agreement which you broker
  • Information on what may happen if you do not sort out the default
  • The creditor’s details
  • Your personal details
  • Early settlement figures (if applicable)

How can you tell if it is a default notice?

Usually, a default notice will usually state that it is a default notice but f you are unsure you can always contact the credit provider.

If you do not want to contact the credit provider then you can look for the below text which will usually appear at the top of the default notice.

  • ‘Important you should read this carefully’
  • ‘Default notice served under section 87(1) Consumer Credit Act 1974’

A default notice will also come with an information sheet from the FCA telling you where you can get free debt help from a debt help charity.

How will a default on your credit file affect your credit score?

A default on your credit file will push your credit score lower. This is because before a default is registered you would have already missed several credit repayments which will have already pushed your credit score down.

A default will reduce your ability to get credit in the future and will stay on your credit file for at least 6 years. 

After 6 years you will find it much easier to get credit but your credit score may still be low.

How can you remove a default from your credit file?

You will usually only be able to remove a default from your credit file if it was an error. The default will remain on your credit file for 6 years even if you satisfy the default.

How long does a default stay on your credit file?

A defaut will stay on your credit file for 6 years even if you satisfy the default but beware,  a default can be reregistered on your credit file by another party if the underlying debt which the default is based on is sold to a third party.

A default cannot be reregistered on your credit file by the same party

If the creditor has not issued a CCJ within the 6 years then the debt will become statued barred and they creditor can no longer pursue this debt in curt but they can still chase it by other means such as debt collectors who may be able to pursue the debt in court.

Can I get a mortgage with a default on my credit file?

Yes, you can get a mortgage with a default on your credit file. There are many bad credit mortgage lenders who may be willing to lend to you even if you have a default on your credit file. 

These bad credit mortgage lenders will usually pay more attention to how old the default is rather than the size and if it has been satisfied or not.

You may have to use a bad credit mortgage broker when looking to get a mortgage with a default on your credit file.

On the other hand, not many high street mortgage lenders may offer you a mortgage with a default on your credit file.

To get a mortgage with a default on your credit file expect to have to put down a much larger mortgage deposit and get a mortgage rate which is not as competitive when compared to someone with a good credit score.

When getting a mortgage with a default you may not be able to use any of the government schemes below to assist with your mortgage deposit as they may insist on borrowers having good credit.

The government schemes include:

  • Lifetime ISA– gives you a government bonus of £1,000 if you save the maximum £4,000 a year.
  • Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
  • Help to buy equity loan- gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
  • Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
  • Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
  • Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
  • Right to buy– allows you to buy your home at a discount price.
  • Preserved right to buy- same as above.
  • Right to acquire- same as above.

Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.

How to check for a default on your credit file?

To check for a default on your credit file you will have to get your credit report as your credit report will show any default which has been issued within the last 6 years, regardless of if the default has been satisfied or not.

By checking your credit files you will also learn how much time is left before a default on your credit file drops.

You should get your credit report from all four credit bureaus to ensure you see what they all hold on you in your respective credit files.

You should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and Transunion.

Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.

Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.

Can your employers see the default on your credit file?

Yes, your employers may be able to see the default on your credit file if they requested a copy of your credit report during your job interview or at the job onboarding stage.

Your employer won’t be able to constantly pull your credit score except you give them authority to do so.

How to reduce the negative impact of a default on your credit file?

To reduce the negative impact of a default on our credit file you can do one of the following things.

Satisfy the default

Satisfying the default within 14 days will get it removed from your credit file but even after this point, you may still see some benefits in satisfying the default.

Wait it out

As time passes the significance of the default on your credit file will reduce and eventually it will not be so important. After 6 years the default will fall off and you can begin to build your credit score again.

Add a note to your credit file

You can contact all of the credit bureaus and explain how you got a default and ask them to add a note on your credit file to your credit account where the default is mentioned. The creditor may have to consent to this.

Build credit

Your final option is to continue looking at ways to build your credit score and history even as the default is registered on your credit file.

Some of the steps you can take to build credit include:

Get on the electoral roll

Get a credit builder card, a credit builder loan or a secured credit card to show good credit behaviour

Avoid missing credit repayments

Avoid having late credit repayments

Keep your credit utilisation below 30%

Keep your credit accounts open for as long as possible

Avoid making too many credit applications in a short space of time

Avoid getting rejected for credit 

In this brief guide, we discussed how a default on your credit file affects you.

If you have any questions or comments please let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.