If you miss or fail to make agreed-upon payments on some sort of debt, you may receive a default notice or “notice of default.” A default is then recorded in your credit file, which can negatively impact your credit rating. If you are then trying to get another form of credit such as a mortgage or loan, or are applying for a position which includes credit checking as part of the pre-employment verification, these defaults could count against you.
What is a Default Notice?
A default notice is a letter sent by the company you owe money to in order to tell you that you are falling behind on payments, and your account may be at risk of defaulting. Usually, a default notice is sent after six months of missed payments. The creditor will usually give you at least two weeks to catch up on missed payments. If you cannot pay, your account will default.
Default Notice and Your Credit Rating
While a default notice itself does not directly affect your credit file, if you do not pay and your account defaults, this will affect your credit score. Creditors may perceive you as a higher risk, and this makes it more difficult to get new loans, credit cards, mortgages, or even a new mobile phone contract.
When you get a default notice in the post, your creditor may demand that you pay the full amount outstanding on the account. While you can ask them whether you can pay in affordable instalments, your creditor does not have to agree to this.
After Default
If you have been given the chance to pay off the debt and fail to do so, the account will officially be in default. If this happens, the company you owe money to has a few options. They could:
- Transfer the debt to a collection agency.
- Take the matter to court.
- For hire purchase debt, ask the court to repossess the vehicle or other goods.
Defaults and Your Credit File
A default will be recorded on your credit file for six years, even if you settle the debt in full. Any default on your file is going to make it more difficult to get other forms of credit, such as mortgages and mobile phone contracts. After six years, the defaulted debt will be removed from your credit file, even if the full repayment has not been completed. Some jobs in the financial services sector may be affected if your account defaults, particularly if credit checks are done before a job offer is made.
Avoiding Defaults
As defaults can have a significant effect on both your credit report and potentially your employment, the best course of action is to try to avoid getting a default in the first place. Defaults are only given after six months of missed payments, so as soon as you realise you are getting into difficulties, speak to your creditor. Many will agree to a payment freeze or temporary lower payments to avoid the expense to them of pursuing the matter further.