If you fall behind with your payments, you will receive a letter warning you that your account will default unless you are able to catch up within 14 days. This applies to all agreements regulated by the Consumer Credit Act 1974, for example personal loans, credit and store cards and hire purchase agreements.
You will usually receive a default notice after missing your contractual payments (or not paying the agreed amount) for three to six months. If you are not able to clear the arrears within those 14 days your account will fall into default.
Breaking the terms of the agreement
Once you have broken the terms of the credit agreement and your creditor makes the decision that you are unlikely to catch up, your account will default. For debts regulated by the Consumer Credit Act however you must receive a default notice warning first.
The Default Notice
When you receive a default notice, it is recognisable by specific wording at the top in large or bold letters.
'Important you should read this carefully'
'Default notice served under section 87(1) Consumer Credit Act 1974'
The default notice will also provide the following information:
- The amount required to bring your account back up to date
- The date you must pay by (this must be at least 14 days)
A Financial Conduct Authority information sheet will accompany the default notice recommending you seek free debt help
When your account is in default
If you don't pay the amount owed within the time frame as stipulated in the default notice, your account will default.
Your creditor will request payment of the full amount of the debt instead of paying the instalments first agreed under the agreement. At this stage you can offer to pay by instalments at an affordable rate, but your offer may not be accepted.
Your creditor may take further action against you, once the account has defaulted, including:
- Assigning the debt to a collection agency
- Taking court action for the full amount
- Applying to a court to repossess a vehicle or other goods, if the debt was subject to a hire purchase agreement
If the debt is regulated by the Consumer Credit Act, your creditor is not able to take further action until a default notice has been issued and the account has subsequently defaulted.
Your creditor will also register the default with one or more of the main credit reference agencies.
Credit reference files and your rating
An individual account can only default once and your creditor will register this on your credit reference file. There are three main credit reference agencies (visit our 'Credit Reference Agencies' web page) and your creditor may mark this on only one, credit reference agencies do not always hold the same information as each other.
When a default is recorded on your account this will be visible to creditors in the future if you apply for further credit. They will therefore be aware that you have not paid your previous debts.
Creditors will normally assume that your defaults means you are a higher risk of not paying back what you borrow. As a consequence it may be more difficult for you to take out loans, credit cards or open certain bank accounts. If you are offered future credit the interest you repay may be a lot higher. You might also find it difficult to obtain a mortgage.
A default will remain on your credit file for six years, even if you eventually pay off the debt in full. After six years, the defaulted debt will be removed from your credit file, even if the debt has not been paid.
Token payments and DMP's
If you have been struggling with your debts and have set up a repayment plan with your creditors, for example a debt management plan or a token payment plan, you will be paying less than your contractual payments. Therefore inevitably your account is likely to default, even if your creditors are happily accepting your nominal payments. You just need to continue with your plan as normal.
If your creditor passes your defaulted account on to a collection agency and you are in a debt management plan, let your provider know. If not you should contact them and explain you have set up reduced payments that you are paying to the creditor, you may need to send a copy of your budget to the collection agency, but they should agree to continue with the reduced payments.
If you are struggling with your debts you should seek advice from a debt specialist to receive free and independent advice. A trained adviser can help you with your budget and discuss all the available options and solutions with you.