Defaulting: the impact on your credit score

Ever wondered how defaulting could affect your future finances? We reveal how many credit score points a default could cost you.

A default isn’t really something you’d want to appear on your credit history. It tells potential lenders that you’ve missed multiple payments on a credit agreement (this could be a credit card, loan, a mortgage, car finance, phone plan or any form of lending), which could scupper your chances of being accepted for credit in the future. 

We take a look at the effect of a default on your credit score and what you can do if you’ve received one.

What does defaulting mean exactly?

Simply speaking, defaulting means you haven’t met your repayments on a credit account. This means the lender can take further action to collect the debt and they’ll cancel your credit agreement you had with them.

While every situation can vary, you’d typically receive a default notice between around 3 to 6 missed payments.

What’s a default notice?

Before your account defaults, you should be sent a default notice in the post. A default notice is a formal letter from your lender warning that your account is about to default because you're behind with the payments. It should also include guidance on what steps to take next.

You’ll usually be given 14 days to repay the total sum of your unpaid debts before the lender either passes the debt on to a debt collection agency or begins the legal process.

How many points will defaulting take off my credit score?

Your credit score could take quite a hit if you default on a credit agreement. According to information from Debt Camel, a default could cost you 350 Experian credit score points - which could turn an excellent credit score into a poor one.

Not only that, but after defaulting, you could also be summoned to court by the lender. This means you could be hit with a CCJ - which could lose you a further 250 credit score points on top of the points you’ve already lost.

While some lenders could still consider your credit application, lots of lenders will be reluctant to lend to people with a recent default on their credit history.

What next after receiving a default notice?

If a default notice has landed on your doormat, you might feel overwhelmed. It’s important to remember that help is available in the form of free impartial debt advice - charities like StepChange can guide you through the process and explain what your options are.

Once you receive a default notice, following these steps could help you work through the process:

1. Check the information is correct

Make sure your name, address all other personal details are accurate to confirm the debt is definitely yours and you’re not a victim of fraud. It’s also worth double-checking the amount of debt is correct before you agree to pay it all back.

2. Talk to the lender

The sooner you reach out to your lender, the better. Whether you’re settling your balance within the 14 days or disputing the default, you’ll need to get in touch as soon as possible. Ignoring the default could lead to court action and a CCJ - which will make the situation worse.

3. It’s not the end of the road

Remember, any lending information on your credit report - good or bad - will be wiped away after 6 years, so it won’t hold you back forever. While you might struggle to obtain credit in the meantime, if you’ve been a responsible borrower (and made your payments on time each month) since receiving the default, your credit should start to slowly improve and open up more options in the future.