What does being default mean
What is the simple meaning of Default?
Some of you may never encounter these terms in your life. This does not mean you don’t need to know them; you certainly do. Knowing what a Default and Default Notice are will help you greatly if you ever experience one and may also help prevent you from receiving either.
Let’s explore this subject by starting with what a default is...
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What is the simple meaning of Default?
When it comes to matters of finance and debt, a default on your account means that you have broken the terms of your agreement. So, for example, if your agreement states that you must pay £100 per month toward your loan and you miss payments altogether or pay £95 instead, then you are not fulfilling the terms of your agreement meaning a creditor can default you.
A creditor will generally only default you if they believe there is no way of you getting your account back on track and after you have missed or underpaid several payments.
Once they decide to do this, a default will appear on your credit file, affecting your chances of borrowing or obtaining credit.
Do remember that you cannot be defaulted without first receiving a default notice; that way, you have the opportunity to prevent this from happening.
Speaking of Default Notices...
What is the simple meaning of a Default Notice?
A default notice is simply a letter from your creditor to warn you that your account is about to default (you know what a default is now). It is usually sent when you have paid under the minimum required payment or have missed payments for a few months.
When it is sent varies depending on the creditor. The letter will clearly state that it is a Default Notice and may be titled as such.
Default notices are only sent for debts under the Consumer Credit Act. Some examples of these debts are bank loans, credit cards, store cards, payday loans, and overdrafts.
How can you stop a default?
The creditor will inform you about your arrears in the Default Notice Letter and ask you to clear them to prevent your account from defaulting. You will not receive a default if you can clear the arrears within the set time period.
So, what happens after a Default is issued?
Once a Default is issued, the creditor will "demand" that you pay the remaining debt amount. If you cannot, the creditor will choose a course of recovery action on your account.
Don’t panic, though; we have a section that will show you the options to manage the situation without having to settle the total amount immediately. For example, using the Token Payment Method based on section 7.3 of the FCA Handbook will prevent any severe recovery action. Visit our I need help with debt section to see all options available with our opinion.
Does a default hurt your credit score?
A default may affect your ability to obtain borrowing while it is showing on your credit file. This doesn’t mean you won’t be able to borrow full stop; this may still be possible. However, the borrowing terms would likely be less favourable (that’s how creditors manage their risk). What we mean by less favourable is:
- Your interest may be higher than expected
- You may be required to have a Guarantor when you borrow (see our article about guarantor loans)
- You may be asked to secure the debt to an asset like a property (secured borrowing)
How long will a default stay on your credit file?
It will stay for six years from the date of default. After that, it will no longer show up, whether you have settled (paid) the debt or not.
Most importantly....
Like savasana in yoga (the bit at the end many overlook), don’t skip this part!
Now you understand default and default notices (whether you have one or are concerned you might soon), we suggest you address what put you in this situation in the first place.
‘What is your mindset like when it comes to spending?’
It’s important to ensure that you have the right mindset; otherwise, you may end up in the same situation again and again.
Remember to read The Real Debt Guy's final thoughts below!
The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.
