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What is a default notice?

A default notice, also known as a notice of demand or a default letter, is the name for a formal letter you receive from a creditor when you’ve missed several payments to them.

It means that you have 14 days to repay any amount you owe before a default is added to your credit file. Usually, the default notice letter will detail the exact action you have to take to resolve the situation.

It’s important not to ignore a default notice, as it can signify that your creditor or lender is gearing up to take even more serious action against you to recover payments, and if the default goes ahead, it can stay on your credit file for six years.

What happens when you get a default notice?

If your credit agreement is regulated by the Consumer Credit Act (1974), your lender must have issued you with a default notice before they can take any further legal action against you.

The default notice you receive will usually be written up as a formal letter, explaining that you’ve broken the terms of your agreement with your creditor. It should include the following information:

  • Details of your name and address, as well as the name and address of the company you owe money to.
  • The nature of your credit agreement, and how exactly it was broken.
  • What action needs to be taken by you to repay the arrears.
  • What your creditor will do if you do not comply with the default notice.

If should also clearly state that it’s served under section 87(1) of the Consumer Credit Act 1974.

A default can be issued on most types of credit agreement, for any amount of money owed.

It’s possible to be issued a default for a larger form of credit like a bank loan, car finance agreement or mortgage, as well as utility bills, mobile phone companies or retail credit agreements, like a catalogue debt or furniture payment plan.

You shouldn’t receive a default notice for missing just one or two payments. Your creditor is only able to issue a default notice when you’ve missed between three and six months’ worth of payments towards your account.

What can a creditor do after I receive a default notice?

It varies. If you pay the default or comply with the terms detailed in it for repayment within the time limit, the debt will be satisfied, and they’ll take no further action.

If you don’t respond to the default, the company you owe money to will prevent you from using any more credit and cancel your account with them.

Things could escalate if your creditor decides to take further action to recover the debt. This can include:

  • Starting court proceedings against you – which could result in a County Court Judgement (CCJ).
  • Passing on the debt to a debt collection agency.
  • Starting proceedings to repossess any goods that are included in the agreement – for example, a TV that was bought via a monthly payment agreement, or a car that was bought through finance.

What should you do when you get a default notice?

From receiving the notice you only have 14 days to contact your creditor and arrange payment – so you must act fast.

A default notice is your opportunity to stop a default from doing lasting damage to your credit score.

First, check all the information on the default notice, including the amounts due and details of the payments missed, as well as your personal details, like your name and address.

If this is all correct, next, you should aim to contact the company you owe money to. Usually, they will ask you to pay off the full amount of the payments you’ve missed.

Even if you can’t afford to do this, you should still speak with your lender immediately to set up an affordable plan for paying back the money you owe.

It’s vital to act on a default notice and not ignore the situation. Receiving a default notice is serious and can result in your creditor passing on your debt to a debt collection agency, or even starting legal proceedings against you to recover the debt.

If you act quickly and make an arrangement with your creditor before the 14-day period has elapsed, you may be able to prevent the default from having a long-lasting and very negative impact on your credit file.

Is a default notice bad?

No-one wants to receive a default notice – but the important thing is act on it as soon as possible, because the consequences of not dealing with a default notice can be much worse.

If you haven’t acted on the default notice within the 14-day window, your credit agreement will be terminated, and the default will be registered on your credit file for six years.

And it doesn’t end there. Your creditor will also be able to demand you repay the entire balance, or they could start court proceedings against you.

Your creditor could also pass on the debt to a debt collection agency, who will continue to pursue the debt by phoning and sending persistent letters until the debt is repaid.

A default can also pave the way for even more serious measures. Your creditor could start proceedings against you to recover the debt, which may result in you having a Country Court Judgement (CCJ) made against you.

A CCJ will also have a hugely negative impact your credit file.

If you owe any one creditor over £5,000, they can even apply to make you bankrupt after issuing you with a default.

Can I stop a default notice?

If your default has gone through, and the 14-day notice period has elapsed without you taking any action, it can’t be removed from your credit file.

Even if you do pay the default off (and you definitely should), once it’s on your file, there’s no way to remove it until six years have elapsed.

However, if the default was issued in error, you have every right to have it revoked.

If you’ve paid the amount claimed in the default already, or a default notice was sent to you by mistake, you’ll be able to ask for this to be removed from your account.

You can also ask for it to be removed if you are not at least three to six months in arrears.

If a default notice has been issued and you’ve only missed one or two payments, you could petition the creditor to remove it.

To ask for the default to be removed, in the first instance, you should contact the lender with proof that it’s been issued incorrectly – for example bank statements showing payments leaving your account.

If your creditor still refuses to remove an unfair default from your account, you can write to the Financial Ombudsman, outlining why the default has been applied unfairly.

If they find this is the case, they have the power to remove all traces of the default from your credit file.

In recent years, it’s also become more common for consumers to argue that they were sold unaffordable credit, especially in the case of some high-interest payday loans and rent-to-buy agreements.

Under the terms of the Consumer Credit Act, a form of credit must be deemed affordable to be viable. If you’ve defaulted on an unaffordable form of credit, it may be possible to have the default revoked.

Does a default notice affect your credit rating?

Yes, but that doesn’t mean you’re completely powerless to improve the situation or offset the negative impact of the default over the course of six years.

A default on your file signals to other creditors that you’ve broken the terms of a credit agreement, so naturally, they’ll associate this with risk.

And as a result, you could be hit with higher APR and find it more difficult to get approval for loans, credit cards or a mortgage.

While a default will drag down your score, there are some things you can do to demonstrate to creditors that you are taking responsibility for the problem.

  • Pay off the default – While paying off your default after it’s been issued unfortunately won’t change the negative impact on your credit score, it does show creditors that you’ve settled the debt, and are less of a risk.
  • Add a notice of correction –You can ask for a note of correction to be added to your credit file to clarify why you got into the situation. If you only have one default, it’s a good way of showing that this was a one-off, and perhaps caused by difficult circumstances, like illness or being made redundant.

Within the first 12 months of being issued, a default can drag your credit score down by as much as 350 points. However, as the years pass, your score will recover.

How can I offset the effect of a default notice?

Until six years have gone by, a default will continue to have a detrimental effect on your credit file.

While you can’t change or completely eradicate the impact during this time, you can try to offset it by improving your credit score in other ways.

  • Make sure you’re on the electoral roll. If you haven’t yet registered to vote at your current address, make this a priority. It’s a really easy way to boost your credit score, and the longer you’re on the electoral register at one address, the better it looks to lenders.
  • Don’t apply for credit. Avoid applying for further credit for at least six months. This will help give your credit score a boost – and also stop you getting any further into debt.
  • Be timely with repayments. If you have any other forms of credit, pay them off in a timely manner. It can help if you automate your payments by setting everything up on direct debit.
  • Choose to pay upfront. Some payment methods are viewed more favourable than others by creditors. For example, if you choose to pay your car insurance annually, rather than monthly, this avoids the insurer carrying out an unnecessary search on your credit file and will be less likely to have a negative impact on your score.

Use a credit rebuild card. Provided you can be responsible with repayments, take out a credit card that’s designed for people with poor credit. Bear in mind, these cards can have very high interest rates – but used wisely, and paid off in full every month, they can be a great tool for rebuilding a damaged score.

Can I be taken to court if I receive a default notice?

Yes, your creditor can take you to court if you don’t respond to a default notice. You’ll know they’ve decided to take legal action against you, as you’ll receive a letter of claim from your creditor. A letter of claim should include:

  • The amount of money you’re due, and if any interest has been included.
  • A reply form that you can use to confirm you owe the debt.
  • A standard financial statement.
  • An information sheet, which should explain your rights, and what you should do next.
  • Information about organisations that can help if you’re in financial difficulty.

If you still don’t respond to the letter of claim, court proceedings will go ahead and the next communication you’ll receive about it will be in the form of a claim pack, which comes directly from the court.

If you don’t respond to the court pack, a CCJ will be issued against you. Not only will this stay on your credit file for six years, it can knock down your credit score by as much as 250 points.

By ignoring the correspondence and protocol, you could even be liable for court costs.

If you’ve been defaulting on debts and your financial situation is deteriorating, it’s time to get help. At Creditfix, our professional debt advisors can help you find a way out – however challenging the circumstances. Call us on 0808 253 2554

today and start feeling better about your finances.