How Will Defaults Affect My Credit Score?

When money gets tight, keeping up with your monthly payments can quickly become a juggling act. Sometimes, despite our best efforts, a ball drops.

Failing to keep up with repayments can lead to a default being added to your account. This can have a negative impact on your credit score, making it more difficult to apply for finance.

To help you understand exactly what a default could mean for your credit score, we’re going to walk you through everything you need to know.

Read on to discover what a default is, how it can affect your score, and whether you can reduce the impact it has.

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What is a default?

A default happens when a payment you're supposed to make on a loan, or any other type of credit agreement, doesn't get paid on time.

Now we’re not talking about being a day or two late here on one or two payments. Defaults are not typically a result of a handful of accidental slip ups.
They're the result of consistently missing payments, and they can stick to your credit report like gum on a shoe.

When a default is added to your account, it’s a warning to lenders that you're having trouble keeping up with your financial commitments, which can make it harder for you to get approved for credit in the future. 

What is a default notice?

Before a default gets added to your credit file, you'll receive a default notice. It’s basically your lender saying "Hey, we need to sort this out."

A default notice isn’t just a casual reminder. It's a legal requirement that lenders must send out before they can take further action on your account.
It gives you a chance to catch up on what you owe before the default is officially recorded on your credit report.

When you receive a notice, get in touch with your lender. They may be willing to work out a payment plan that suits your current financial situation.

Keeping the lines of communication open shows you're proactive about sorting things out.

Treating a default notice seriously and acting quickly can sometimes prevent the default from being recorded, helping to protect your credit score.

How does it affect my credit score?

A default is much worse than a simple missed payment and it can cause a significant drop in your credit score. According to Debt Camel, you could lose as much as 350 points for a single default. 

It doesn’t matter whether the default was for £25 or £250,000, you’ll lose the same amount of points regardless of how much you owe.

How long will it stay on my credit file?

Defaults don't disappear overnight. They stick around on your credit file for six years, regardless of whether you pay off the debt after the default is recorded. 

This default can affect your ability to get credit for quite a while, acting as a long-term reminder of financial difficulties you faced. 

However, its impact on your credit score does decrease over time, especially if you take steps to improve it.

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Can I get a default removed from my credit file?

Getting a default removed from your credit file isn't easy, but it's not impossible. 
If the default was recorded in error – say, you never actually missed a payment, or there was an administrative mistake – you can dispute it with the credit reference agency or the lender.

You'll need to provide evidence to back up your claim. If the lender agrees that the default was a mistake, they'll remove it from your credit report.

In cases where the default was correctly placed, it's much harder to get it removed.

Your best bet in these situations is to focus on rebuilding your credit by managing your current finances responsibly.

Over time, the default will become less significant, and your newer, more responsible habits will start to outweigh past mistakes.

How can I reduce the impact of a default?

While a default isn’t the best news for your credit score, it's not the end of the road either. There are steps you can take to soften the blow and start repairing the damage.

Consider paying off the defaulted debt as soon as you can. While the default itself will still be visible, a "paid" status looks better to future lenders than an outstanding balance.

Also, keep on top of your other credit commitments. Making regular, on-time payments on your other accounts can help to gradually rebuild your creditworthiness in the eyes of lenders.

Will my credit score improve faster if I start to pay off my default?

Paying off a default doesn’t help you improve your credit score faster. You’ll still need to wait up to six years before its effects wear off.

However, when you settle a defaulted debt, it updates the status to "paid". While your report still shows the default, it tells lenders you've taken responsibility to clear what you owe.

This can make you appear more financially responsible than if the default remained unpaid.

Remember, the impact of a default diminishes over time, especially if you're demonstrating that you're managing your money more effectively now.

If you have a default on your credit report, it won’t necessarily affect your ability to get car finance. However, it will impact the rates you are offered.

For this reason, we do recommend taking steps to improve your score before you apply.

FAQs About Credit Scores:

What happens if I miss my payments?

Missing payments can decrease your credit score, letting lenders know there’s a potential risk in lending to you. It reflects poorly on your financial reliability and could affect your ability to secure credit in the future.

What can I do to improve my credit score?

You can improve your credit score by consistently paying your bills on time, maintaining low balances on your credit cards, and keeping old credit accounts open to lengthen your credit history. You can also diversify your credit to boost your score by managing different types of finance accounts responsibly.

How long does it take to rebuild credit after a default?

Rebuilding credit after a default is a gradual process, taking up to six years. However, by adopting positive credit habits early on, you can mitigate the impact over time and gradually improve your score.

How much does one default affect your credit score?

A single default can significantly impact your credit score, acting as a red flag to future lenders about your creditworthiness. It can take up to 350 points off your score, though its impact will reduce over time.