Article by Tom Blandford - 23rd April 2019

Late Payments & Defaults: What's The Difference?

When a lender checks your Credit Report, one of the most important elements it considers is payment history as reported to the Credit Reference Agencies. On a perfect applicant’s Credit Report, every credit account would be reported with a clean payment history, indicating that they are a low risk to the prospective lender, but in the real world this isn’t always the case.

The average consumer’s Credit Report is likely to include negative payment history in some shape or form that could adversely affect their ability to get credit. However, not all negative information carries the same weight.

It’s not true that if a scheduled payment is missed or made late, the account immediately enters Default. In reality there are a number of different types of marker which affect your ability to get credit very differently.

See how different markers appear on your report

Aren’t late payments and defaults the same thing?

Credit Reporting systems in some other countries (notably Australia) consider late payments and defaults to be much closer in definition than we do in the UK. In contrast, late payments and defaults are very different things on UK Credit Reports and as such, they have a different impact on your credit history.

A late payment can be reported as soon as one day after a payment has been missed – if this account is not brought up to date (the amount owed is paid), the account will be flagged with increasingly serious arrears and can eventually be placed into Default at the discretion of the lender. While the amount of time that a lender will wait before taking this action varies according to its own criteria, an account is typically defaulted after it has been in arrears for three to six months.

While a single late payment on your Credit Report is unlikely to affect your ability to get credit significantly, a default will have a noticeable effect for the six years it remains visible on your Credit Report. Bear in mind though that the greater the number and seriousness of late payments, the more likely you are to see your Creditworthiness affected as a result.

How lenders view late payments

Having the odd late payment recorded on your Credit Report isn’t uncommon and in isolation shouldn’t cause you too many problems when applying for new forms of credit. The impact will vary, depending on the other information that is recorded – for example how many other, well-maintained accounts you have, whether you are on the Electoral Roll, your Financial Associations and whether there is any Court Information recorded against you.

The recency, severity and frequency of late payments will also affect how much of a negative impact the information has. A large number of recent payments of up to 3 months late for example, will have a much more detrimental effect than a few isolated late payments from a number of years ago.

Late payments remain on Credit Reports for a period of six years, or for six years after an account is closed – whichever is longer.

So what is a default?

When an account enters Default, it shows that it has been closed by the lender as a result of unpaid, serious arrears. For regulated credit agreements, this shows that a consumer failed to respond to a Notice of Default – which after being issued gives you 14 days to clear a debt or come to an agreement with the lender over repayment, before it is lodged on your Credit Report.

Defaulted accounts remain reported for 6 years from the date of default, not the date of the account closure. Even if the debt is settled, the record of the default will remain on your Credit Report.

While settling a defaulted account is unlikely to have any positive effect on your overall Credit Rating, it should prevent the debt from being pursued any further through the court system and even more severe markers being registered against you. Because court judgments are recorded on the Public Information section of your checkmyfile Credit Report, it would mean that it could be viewed by potential landlords, employers and even some insurers as well as other lenders.

How to avoid late payments

It may seem obvious, but paying on time is the key. Here are a few things you can do you help your Credit Report stay free of late payment markers.

  • Pay by Direct Debit – rule out the chance of forgetting to make payments and ensure the associated current account has enough funds available to fulfil the direct debit instructions.
  • Check statements carefully – make sure that you know exactly what is owed and due on any account. It only takes a small balance to go unpaid for a late payment to be recorded.
  • Stick to a manageable amount of credit – excessive amounts of credit can easily lead to missed payments, and this can easily spiral out of control. Lenders have an obligation to lend responsibly, but the obligation is also on the part of the consumer to make sure they’re using a sensible amount of credit.
  • Monitor your Credit Report – errors are rare, but they do happen. Make sure that your Credit Report is accurate by checking it regularly. Should you find a late payment recorded that you believe is there in error, you will be able dispute it.

To see what lenders see, you can try checkmyfile free for 30 days, then for just £14.99 a month afterwards, which you can cancel at any time. You’ll get complete access to the UK’s most detailed Credit Report, with information from 4 Credit Reference Agencies, not just 1, letting you see the bigger picture.

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