Does Paying Defaults Improve My Credit Score?
Credit scores play a crucial role in getting car finance. Whilst you don't necessarily need a high credit score to secure lending, having one certainly helps and makes life that little bit easier during the application. Therefore, it's not unreasonable that you'd want to understand everything regarding your credit file and how it relates to getting a loan, including the topic of defaults. Here, we look at whether paying defaults improves your credit score and how they work when it comes to your credit report.
What is a default?
Let's start by saying that defaults aren't good. A default is when a lender closes your account because you've missed a payment, which can happen to anyone with a bank account, mobile phone contract or utility supplier account.
A default can happen regardless of how much you owe, whether it's a few pounds or a few thousand. It usually occurs when you've missed several payments over the course of three to six months, although the exact time frame depends on the lender's terms at the time you took out the finance.
You want to avoid defaults at all costs, so it's worth keeping track of when you're due to be charged and ensuring money is set aside for the payment. Taking this approach will help you avoid defaulting on any of your accounts.
How Long do Defaults Stay on My Credit Report?
Unfortunately, a default isn't something that comes and goes quickly. They can stay on your credit file for six years from the initial default date, even if you pay off the debt. That doesn't mean that having a default on your account will cause issues with your credit for the entire time it's on your file. Yet, it's still best to avoid falling into default on your payments.
Lenders also can't re-register defaults once they've been removed, even if you still owe them money. So it won't continue to harm your score after six years. That doesn't mean you don't have to pay the default, though. Lenders can sell your debt to a collector, and you'll still owe the money.
Will Paying Off a Default Improve My Credit Score?
So does a settled default improve your credit score? It's complicated. Technically, paying a default won't have a direct impact or improve your credit score. Over time, however, your score will gradually improve as the default gets older. Plus, some lenders will only lend once the defaults are cleared.
Therefore, paying the default as quickly as possible is in your best interest. Repaying any debts when possible also reduces the chance of further financial punishment, such as CCJs and, at worse, bankruptcy. Those two things, in particular, can be catastrophic to your credit rating.
Can I Still Get Car Finance if I Have a Default?
A default on your credit file negatively impacts your chances of getting finance, including car loans. When you apply for credit, lenders check your report to decide if you're a responsible borrower. A default on your file may cause lenders to see you as a lending risk, significantly decreasing your chance of getting the loan.
There are options, however. You can look for a specialist lender for people with bad credit, although you should expect to pay higher interest rates. Before getting any type of finance, make sure you can repay the repayments without any issues.
Can I Remove or Update a Default From My Credit File?
If the default is correct and hasn't been on your score for six years, then there isn't a lot you can do. If you believe the default is inaccurate or it has been more than six years, you should contact the credit reference agency to remove it from your credit file. They will get the lender to establish the accuracy of the default. If a mistake has been made, the credit agency will remove the default.
Can I Reduce the Negative Impact on Defaults?
There's little you can do once a correct default is recorded on your credit file. There are, however, ways to reduce the default's negative impact. For starters, you should try and pay off what you owe as quickly as possible so the default is marked as "satisfied" on your credit report. This looks better to lenders.
You can ask the credit reference agency to add an explanation to your credit report to help lenders understand why you got into debt. Time is also a healer for defaults – the more time goes by, the less important the defaults become on your credit file. Last but not least, you can take steps to improve your score by registering to vote, keeping a consistent address history and ensuring all future payments are made on time.
The Default Way
Having a default on your credit report is far from ideal, and paying it won't remove the default from your report entirely. Ideally, you'll avoid defaults altogether. But if you do have one, the steps in this guide can help mitigate its impact, meaning it doesn't need to be the end of the world as far as your hopes of securing finance are concerned. If you need help to identify the reasons for a poor credit score or how to improve them, have a look at Clearscore on personalised ways to improve your score.