What Are Defaults and How Do They Impact You?

What Are Defaults and How Do They Impact You?

What Are Defaults?

A default is a negative marker on your credit file that occurs when your account falls more than 6 months in arrears. The creditor will then no longer see you as able to pay and consider the debt as defaulted.

This could happen with any kind of payment, whether it’s money you owe to a mobile phone company, utility supplier (gas, electric or water) or bank.

A default can occur no matter how much money you actually owe and can range from a few pounds to thousands of pounds.

Before this happens, you’ll receive a notice of default, this will be where the lender gives you 14 days to catch up on the missed payments before they issue the default. This would be your last chance to pay off the debt before it goes against you.

The purpose of the default notice is to get you to make the payments that you have missed before they take legal action against you.

Once a default is on your credit file, it will reduce the lenders/creditors who will consider your application, which often means having to pay higher interest rates and potentially affect your chances of getting things on credit such as mortgages.

The main reason for a poor credit score is missed payments, so always set up a direct debit for the minimum payment where possible. As long as the funds are there, you will always make a payment on time.

Defaults should be taken seriously, but if you have one it’s still possible to get a mortgage.

How Long Does A Default Stay On Your Credit File?

Regardless of whether you pay the debt off, the default will stay on your credit file for six years from the date of the default. With a default there isn’t any kind of grace period that gives you a chance to repay the default to get it removed from your credit file, it’s there straight away.

Types of defaults have different levels of severity and future lenders will look at which type of default you have before deciding to lend you money.

Below shows the level of severity from most to least:

  • Mortgages and secured loans
  • Unsecured loans
  • Credit cards (often the most common)
  • Utilities
  • Phone, internet, and TV bills

So, mortgage payments are seen as the most crucial kind of default and will make it extremely difficult for you to get accepted for another mortgage in the future.

Some lenders will take certain defaults more seriously than others, and some will ignore certain types (such as utilities and communication defaults) completely, although this isn’t as common.

Some lenders will never accept any mortgage applications for anyone who has a history of a default on their credit file, whether it was for a mortgage or a phone bill. They will see a default as damaging and untrustworthy no matter what it’s for.

How A Default Creates a Poor Credit History and How That Affects Your Chances

Once a default is on your credit file, it could damage your chances of getting not only mortgages, but further credit. You may struggle to take out things such as phone contracts, as those companies will also do a credit check on you before deciding whether to lend you money.

The reason this happens is because before anyone lends you money, they will look at your credit score and your finance history to see if you can demonstrate the ability to manage debt. When a lender looks at your credit score and it’s poor, it usually acts as an instant red flag because it will make you look like you’re at risk of not making payments on time. If there’s history on your credit file of you not being able to pay back a loan each month, for example, that will show that you may struggle with mortgage payments until your finances are more in check.

At Adverse Mortgage Advisors we specialise in bad credit mortgages. These are mortgages that are much easier for people with low credit, defaults, CCJs or similar financial issues to get. The interest rates and fees may be higher and there could be a lower limit on how much you can borrow. You may also be asked to come up with a larger deposit of 20-30% of the value of the property, rather than the usual 5-10%.

Keep in mind that having a few small issues such as the odd late payment on a phone contract, utility bill etc isn’t the same as a default and should not stop you from getting a mortgage or credit.

How to Build Your Credit and Improve Your Chances of Getting a Mortgage/Credit

Lenders will check to see how you manage your finances by looking at your income, monthly outgoings, and savings. Basically, what you earn compared to what you spend. Below we’ll list a few different ways for you to strengthen your credit score before you apply for more credit.

  • The most important thing for you to do is demonstrate financial stability by meeting any payment deadlines you have, this includes utility bills, loan payments, rent and credit card payments. Pay these on time and in full. If remembering when your bills come out is a struggle, then make notes of the dates of all of your payments. You can also take advantage of banking apps that alert you when your balance is low and when you have payments coming out. This will help you keep up to date with exactly how much is coming out and when.
  • Reduce costs where you can, try to keep monthly outgoings as low as possible. Aim to always have money left over at the end of each month.
  • Registering to vote will be another way for you to easily increase your chances, being on the electoral roll is one of the main things that’s searched for when you’re credit checked.
  • Pay off as much of your debt as you can and cancel any unused credit cards. The less debt against your name when you’re applying for credit, the better.
  • Get a guarantor – a family member may be willing to be named as your guarantor to help your chances of being accepted for a mortgage. But you’ll have to take into consideration that if you miss payments, this means that it will affect both of you. If you default on mortgage payments your guarantor will be asked to pay. If they can’t pay, then it could lead to them getting their house repossessed in the worst case.
  • Accept help from family if it’s offered – most lenders will accept a deposit if it’s gifted from a family member. But there must be no obligations for you to pay this back to whoever gifted it to you.

Final Thoughts

Defaults doesn’t necessarily stop you from ever getting a mortgage. If there are reasons for past financial difficulties like ill health or redundancy, add a note so your lenders can see, they may be more forgiving in these circumstances.  Speak to a mortgage advisor – they will help you find the right mortgage for you with a deal you’re likely to be accepted for, and help you write your application.

These things won’t guarantee that you’ll get approved for a mortgage or credit, but it will increase your chances and show lenders that you are making efforts to improve.

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If you have questions about getting a mortgage with an adverse credit score, read our FAQs. Our wealth of knowledge within this market means that we’re confident in our ability to offer specialist mortgage advice and secure the mortgage you want regardless of your credit history.

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