What Happens to your Credit Score When a Default is Removed?

There’s no doubt that debt continues to rise in the UK, with the cumulative sum of £1.6 trillion owed by people as of June 2018.

This figure had increased from £1.55 trillion during the previous year, with unsecured debt pertaining to credit cards and loans continuing to increase incrementally in a challenging economic climate.

With this in mind, it’s little wonder that UK credit card defaults have risen to the highest level in almost two years, with households struggling to manage their debts. But what exactly is a default, and what happens to your credit score when one is removed from your report?

What is a Credit Default?

In simple terms, a default occurs when a lender decides to close an account due to a series of missed payments. Defaults can have an affect on your credit score and can take years to put right.

This can happen to both unsecured and secured accounts, from credit card debts and loans to mortgages and car finance agreements. It’s also possible to default on money owed to utility suppliers in some instances, regardless of the total value of the outstanding debt.

Whilst the precise terms of a default vary depending on each individual lender’s terms, although as a general rule it’s usually imposed on borrowers who miss payments over a period of between three and six months.

So, you need to be wary of the threat posed by defaults if you’re struggling to manage your debts, as otherwise you’ll run the risk of significantly damaging your credit score or losing your home in the worst case scenario.

Credit defaults should be treated seriously as it can prevent an individual from applying for a mortgage or a loan. The reason for this is that no direct lenders will offer any form of finance with no credit check being performed to assess an individuals affordability.

How Do Changing Circumstances Lead to a Default?

The damage caused by a default is certainly long-term, as this will be reported to the relevant credit reference agencies for a period of six years from the date of the original default.

There is no doubt that a default will be noticed by any potential direct lenders, especially if you are applying for a loan. A default will not necessarily cause you to fall into the “bad credit history” bracket, however a direct lender will notice that you have failed to make a payment which may act as a red flag to them.

For many people that have defaulted on a payment, applying for a loan with bad credit will also be harder as many direct lenders will not want to lend to someone who has consistently missed payments.

After this time, they drop off your credit score completely, although agencies do have an additional 28 day administration period to remove them at the end of the six years.

But how exactly do defaults occur in the first place? In truth, they’re most likely to occur during a period of transition in your life, with factors such as redundancy, illness and increased spending all contributing to mounting and unmanageable debt.

As your circumstances change and earning potential declines, you’re increasingly likely to incur debt as you strive to maintain your existing lifestyle. This can often lead to late and missed payments over time, creating a scenario where you may default on one or a number of your accounts.

Does your Credit Score Go Up when a Default is Removed?

Defaults represent a serious negative market on your credit score, and in most instances they’ll prevent you from taking out both secured and unsecured loans.

However, if you only have one default on your file, you’re likely to see a significant improvement in your credit score once it has been removed. Of course, this depends on your specific credit history and the presence of other negative markers such as CCJs, but as a general rule your score should improve when a default falls from your report.

In most cases, borrowers tend to incur more than one default if their financial issues persist for an extended period of time.

In this instance, you’re unlikely to see a significant improvement in your credit score when a single default drops off, as others remain on your file and the risk to potential lenders remains apparent.

The Last Word

Ultimately, dealing with defaults requires a long-term strategy, as you’ll need to bide your time and wait for these accounts to drop off your file before you start to see significant improvements to your credit score.

In the meantime, however, there are other steps that you can take to prevent further defaults from lowering your credit score even further.

It’s certainly important to get on top of your remaining credit accounts, for example, as your focus should remain on making current payments on time and showcasing a responsible approach towards borrowing.

We’d also recommend maintaining a history of positive credit transactions wherever possible. Whether this means keeping an existing account active or taking out a new credit card that’s tailored to suit applicants with a poor credit history, this proves to lenders that you can repay lines of credit and borrow responsibly.

If you are looking to take out additional forms of finance in order to make regular repayments to improve your credit score, it is important that you understand how to borrow money correctly and the potential risks that may arise.