What is a credit card debt default?

By Benjamin Salisbury

Millions of UK adults receive default notices each year due to missed mobile phone, utility or credit card payments, and these default notices take a toll on your credit score.

What is a default notice? "A default is issued by a credit provider when a credit agreement has been broken," Melanie Taylor, debt expert at the Debt Advisory Centre, said in an emailed response to questions. "When you take out a credit agreement you agree to make a certain payment each month.  If you miss a number of payments, pay them late or in part, then the creditor will issue you with a default."

Default notices apply only to debts regulated by the Consumer Credit Act, such as credit and store cards, payday loans, personal loans and hire purchase agreements. debt-default

"Lenders' and providers' policies vary, but usually they will only issue a default once three to six monthly payments have been missed," Taylor said.

According to the Debt Advisory Centre, in 2015, one in five people defaulted on at least one account. The most common reason for defaulting: missed payments on a credit card. One in nine people questioned said they defaulted on a credit card account.

If you've received a default notice, here's how that default will affect your credit score, what happens if you ignore the notice and how you can get help:

Is that notification a default notice?
If you receive a letter but are not sure if it's actually a default notice, check for the following information:

  • Default notices often have text at the top in large or bold letters that reads, "Important! You should read this carefully", or "Default notice served under section 87(1) Consumer Credit Act 1974".
  • The notice will tell you how much you need to pay to bring your account up to date and the deadline to make this payment; you must get at least 14 days.
  • You also will receive an information sheet from the Financial Conduct Authority recommending you get free debt help from a debt charity.

If you make your payment within the 14 days, the account will carry on as normal. If not, the account will be in default, which will be noted on your credit file.

What is a default's impact on your credit rating?
Defaulting on a debt can negatively affect your credit rating. Potential lenders who check your credit will see a default, and may assume there is a higher risk of not getting their money back.

As a result, you are less likely to be accepted for a mortgage, loan or credit card. Even if you are approved, you could be blocked from the best rates available.

A default stays on your credit file for six years, even if you eventually pay off the debt in full.

What happens if you ignore a default notification?
Initially, the creditor will ask you to pay the full amount rather than repaying in instalments as previously agreed. You can offer to repay in instalments at a rate you can afford, but the creditor does not have to agree to this.

"Generally, lenders will continue to add interest and charges to what you owe, so if you try to ignore your missed payments, the amount you owe will actually grow," Taylor said.

The creditor also can pass the debt on to a collection agency, take court action or apply to a court to take back a vehicle or other assets if the debt was related to a hire purchase agreement. The creditor can also register the default with one or more of the credit reference agencies. 

What help is available?
If you think you will miss a credit card or mortgage payment, perhaps due to an emergency, contact your creditor and explain the circumstances. By calling in advance of the due date, you may be allowed to pay the following month or miss the payment without racking up a default.

However, if you have been sent a default notice, it makes sense to seek professional debt advice before your creditor starts legal action -- which usually results in a County Court Judgement, said Taylor.

Contact a free debt charity such as the Debt Advisory Centre, Citizens Advice Bureau or StepChange to get free and impartial advice and help before your creditors take further action.

"Getting a default notice is a wake-up call that your finances are getting out of control," Taylor said. 

See related: With long 0% balance transfer deals, one strike, you're out, How 'no-consequences' credit can lure you to debt, How to rebound from a poor credit score

Published: 7 October 2016