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Debt solutions

27th January 2022 · 4 minute read

Published by The Real Debt Guy

  • Default
  • Credit rating
  • Credit report
  • Defaulted debt
  • Default notice
  • Credit file
  • Debt Default
  • Debt Default UK

What does being default mean

Debt Default and Default notices explained

Some of you may never come across these terms in your life. This does not mean you don’t need to know them, you most certainly do. Just like you might have been taught CPR at school not thinking you would ever need it, the next minute you’re giving mouth to mouth. 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 starting with what a Default is...

Not in the mood to read? We got you covered. Listen to the rest with the YouTube link at the bottom of the page

What is a 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 you have an agreement to 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 a number of payments.

Once they do decide to do this, a default will show up on your credit file and may affect your chances of borrowing or obtaining credit.  

Do bear in mind you cannot receive a default without first receiving a default notice, that way you have the opportunity to prevent this happening.

Speaking of Default Notices....

What is 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 state clearly it is a Default Notice and may be titled as such.

Default notices are only sent for debts that fall under the Consumer Credit Act like, bank loans, credit cards, store cards, payday loans, overdrafts etc.

How do I stop the Default?

The creditor will let you know in the Default Notice Letter what your arrears are and will ask you to clear the arrears to prevent your account defaulting. If you are able to clear the arrears within their set time period you will not receive a default.

So, what happens after a Default is issued?

Once a Default is issued, the creditor will "demand" that you pay the full remaining amount of the debt. If you are unable to, the creditor will choose a course of recovery action on your account.

Don’t panic though, we have a section that will show you options you have to manage the situation without having to settle the full amount immediately. For example, using the Token Payment Method based on section 7.3 of the FCA Handbook will prevent any serious recovery action. Visit our I need help with debt section to see all options available with our opinion.

We mentioned earlier that a default will show on your credit file but how long will it stay there for? That’s next....

Default and my Credit File

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. It is likely that the terms of borrowing would be less favourable though (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)

In terms of how long the default will show on your credit file, it will be for six years. After that, it no longer shows whether you have settled (paid) the debt or not.

Most importantly....

Just like savasana in yoga (the bit at the end many overlook), don’t skip this part!

Now you understand debt 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. Importantly ask the question ‘What is your mindset like when it comes to spending?’ It’s important for you to make sure you have the right mindset otherwise you may end up in this same situation time and time again.

Don't forget to read The Real Debt Guy's final thoughts below!

The information in this article is considered to be true and correct at the date of publication.

The Real Debt Guy's final thoughts.

We are about prevention as well as cure, the more you know the more you can prevent yourself from falling into situations that will have a negative effect on you (financially or mentally). Our Financial Education section is here for you to keep building your knowledge and we always link thought provoking articles to help challenge your mindset. Our newsletter will keep you informed so don’t forget to sign up at the bottom of this page.

Simplifying complicated matters.

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