Credit Score Basics > What does a default mean?

What does a default mean?

Wollit TeamUpdated 29th July 2024

A default can mean many things, but when it comes to credit products like loans, and mortgages it means the failure to pay a bill completely. According to the Cambridge Dictionary, for example, default is defined as "to fail to do something, such as pay a debt, that you legally have to do.”

Defaulting can lead to serious consequences, including legal actions, repossession of assets, and significant damage to credit scores.

Let’s have a closer look at what it means and what you should do if you're in one.

How many kinds of defaults are there?

When it comes to your finances, you’ll most likely come across these types of defaults:

Payment default: this occurs when you fail to make scheduled payments on a loan or even an utility bill. For example, if you miss several mortgage payments, then you’re in default.
Technical default: this happens when you violate a term of the loan agreement that does not necessarily involve missed payments. For example, if you don’t maintain insurance on a mortgaged property, you may be considered in technical default.
Judgement default: this one happens when you’re scheduled to appear in court (for example, because of unpaid debts) but fail to do so, resulting in a default judgement against you.

These are the kinds of defaults that are meaningful when it comes to money. There are other kinds of default as well, but we won’t cover them here:

In sports, default can refer to a situation where a player or team fails to compete in a scheduled match, leading to a loss by default.
In technology, default can refer to the “factory” setting of a computer or phone.
And so on.

What happens when you default on a loan?

When you default on a loan, this is what you can expect:

The lender may impose late fees for missed payments.
The account may be handed over to a collections agency, which can pursue you for the owed amount.
In some cases, lenders may take legal action to recover the debt, leading to court proceedings.
For secured loans, such as mortgages or car loans, the lender may repossess the asset to recover their losses.
You can also expect a hit to your credit score both when the default is reported to the credit agencies and when escalation (repossession, CCJs) happen.

How long does a default stay on my credit report?

In the UK, a default can remain on a credit report for up to six years. During this time, and especially the first few years, it can significantly affect your ability to secure new credit.

After the six-year period, the default will be removed. However, while it won't affect your credit score anymore, you might still have to disclose it to lenders if they ask you about it.

How can I prevent a default?

Preventing a default is not impossible, but it does take some work. Here are some tips:

Create a detailed budget to stay on top of your finances and ensure that loan payments are prioritised.
Set an emergency fund, which can provide a financial cushion in case of unexpected expenses or loss of income.
If you can’t make payments, talk to the lenders. They can work out payment plans or even temporary forbearance (when you don't have to make payments for a while).

Can I recover from a default?

Yes, you can. Here are some steps you can take:

If possible, catch up on missed payments; this can help mitigate the damage.
Negotiate with lenders. They can be more understanding than you think.
Monitor credit reports regularly, to make sure that the default is removed correctly at the end of the six-year period.
Build a positive credit history. This is potentially the most important and effective thing you can do. The good news is that now there are many apps that can help you build and improve credit. One such app is Wollit.

Wollit works by reporting a fixed-fee monthly subscription as a loan repayment to all credit reference agencies. This helps you build a history of timely debt repayments, which is the main factor that matters for your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders you pay your bills on time, helping you reduce the impact of a single default in your overall credit file – especially as time passes.