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When you enter into a credit agreement, such as a personal loan, car loan, or mortgage, it’s important to keep up with your agreed payments to avoid your creditors from taking serious action against you.
Failure to make payments in full or on time can lead to you breaking the agreed terms of your agreement and receiving a default, which is when the lender closes or restricts your account due to frequent non-payment.
This guide will outline the effect of a default on your finances and how to get a default removed from your credit file.
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Before outlining how to get a default removed from your credit file, it’s important to understand what a default is. Put simply, a default is a negative marker added to your credit file indicating that you’ve missed payments and broken the terms of a credit agreement.
There is no minimum amount of money you need to owe for a default to be issued and it’s possible to receive a default whether you owe £10 or £10,000. However, in most cases, you will be served with a default after you have between three and six months’ worth of missed payments.
Each lender will have its own criteria and process for issuing defaults, but for debts regulated by the Consumer Credit Act (1974), they are legally required to send you notice of a default before it is added to your credit file.
The first indication that your account has defaulted will be in the form of a default notice, which is a formal letter sent from your creditor informing you that you have several missed payments.
When you receive a default notice, it should include the following information:
When you receive a default notice, you will have 14 days to make up for missed payments before a default is added to your credit file. However, if full payment is made within this time, your account won’t be defaulted. The default notice will still appear on your credit file but will show as ‘settled’, showing that you took responsibility for the missed payments.
When you are at risk of defaulting, you will be informed through a default notice and given an opportunity to make up for missed payments. Regardless of whether you repay the amount owed, it will also be added to your credit file for six years from the date you defaulted.
The easiest way to know if you have a default is to access your credit file from each credit reference agency (Experian, TransUnion, and Equifax). Any recent defaults will still be visible, while defaults you received more than six years ago will have dropped off your credit file and will no longer affect your credit score or ability to borrow money.
When you receive a default notice, it can be tempting to just ignore it and hope it goes away. However, your creditor can take further legal action against you to recover the money they are owed.
When this happens, you’ll receive a letter of claim informing you of the next steps your creditor has taken. This is a formal letter informing you of upcoming court action and giving you a final chance to make up for missed payments before the case is escalated to court.
Failure to respond to a default notice and a letter of claim can result in a debt collector or debt collection agency being assigned to collect the debt. Alternatively, court proceedings may be brought against you. When this happens, you’ll be sent a letter from the court assigned to handle your case informing you of your next steps.
This could involve a County Court Judgment (CCJ) being issued against you, which is a legal judgment meaning the court has decided you must repay the money. CCJs stay on your credit file for six years from the date of issue, during which time you could struggle to get approved for further credit, such as a personal loan, mortgage, or even phone contract.
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When you apply for credit, lenders will check your credit file to determine how likely you are to make payments in full and on time, and having a default on your credit file indicates you have broken the terms of a credit agreement and are an unreliable borrower.
This can make it difficult to get approved for a variety of credit agreements that require regular repayments, such as payday loans or personal loans, and even if you are approved for credit, you will likely be subject to higher interest rates to cover the lender in the event of you defaulting again.
While it may be difficult, it isn’t impossible to borrow money with a default on your credit file. Some lenders offer special deals for people with a poor credit rating or credit history, but these options often have high interest rates and low credit limits, so you must ensure you can afford the monthly payments before taking out credit.
Before a default is added to your credit file, you should be given multiple opportunities to dispute the debt or repay what you owe. However, sometimes a default can appear on your credit report because of an error or be added later than it should have been.
When a default appears because of an error, you can apply for the default to be removed. This could happen if:
When a default is added later than it should have been, you may also be able to apply to have it removed at the right time.
This is unlikely to cause too many problems until six years later when the time comes for the default to fall off your credit file, but can mean your finances are negatively impacted for longer than necessary.
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There are various steps you can take to try and get a default removed from your credit file, but it can be a time-consuming process that you must instigate and a successful outcome isn’t guaranteed.
The only way to get a default removed from your credit file is to contact credit reference agencies directly and raise a credit report dispute, proving why it has been issued incorrectly with bank statements or receipts.
They will then contact the lender on your behalf and request that they review the information they hold on you to ensure it is still accurate.
During this time, a notice of correction will be added to your credit report to let lenders know that the information may be incorrect and is currently being investigated. If the information is found to be incorrect, your credit report will be updated and your credit score will increase.
However, if the creditor disagrees with you and is confident the default should be there, the credit reference agency will let you know what your next steps should be.
While it won’t get a default removed from your credit file, repaying the money owed can prove to lenders that you are capable of making up for missed payments and are less of a risk.
When you apply for credit, you may still need to explain the missing payments and what led to the defaulted debt in the first place.
Setting up a payment plan, such as a Debt Management Plan (DMP), also won’t get a default removed from your credit file, but it can help you improve your financial situation if you’re struggling to afford your monthly payments.
When you leave a DMP, your debts will be repaid and you’ll be free to make a fresh start with your finances.