Defaults and Credit Reference Agencies (CRAs)

If you fail to make contractual payments into a credit account, the creditor will default you. You should receive a Default Notice giving you time to correct the breach before a default is recorded. If you remain in default, the Credit Reference Agencies (CRAs) will be notified and you will have a default on your credit file.
Overview

The Information Commissioner (ICO) deals with the conduct of Credit Reference Agencies and the information they hold. They publish a very useful Guide to Credit.

Creditors should follow the Principles for the Reporting of Arrears, Arrangements and Defaults at Credit Reference Agencies.

Defaults always drop off your credit file six years after they are recorded, regardless of whether you make any payments towards the debt or not.

Credit scoreCCJs also remain on file for six years, as do bankruptcy and DROs. IVAs will also remain for six years unless the IVA lasts longer than that.

When the official receiver obtains a bankruptcy or DRO restriction order, these orders will stay on record for as long as they last.

Once a default is recorded, it will remain on file even if you later settle the account. In this case it should be marked ‘settled’ or ‘satisfied’.

Creditors won’t normally agree to remove defaults even if you offer to pay the amount in full. There may be exceptions, but they are very rare.
You can only have ONE default recorded for each account, even if the account is sold or assigned.
The original date when a default was recorded is the one that counts towards the six year period, even if the account is sold or assigned.

When an account is sold or assigned, it will often appear as settled with the original lender and the default will appear in the name of the new owner.

If a creditor obtains judgment against you (a CCJ), the judgment will stay on file for six years regardless of the original date a default was recorded on the account.

Default information on your credit file is not a positive indicator of whether an account is statute barred or not. See statute barred. If a default was recorded over six years ago, it would no longer be on your credit file but the debt may not be statute barred if payments were made after that date.
Credit defaults must not be confused with Default Notices (DNs) issued under s.87 of the Consumer Credit Act. A Default Notice is not required for current account overdrafts, utilities or services such as mobile contracts. See Default Notices.

Credit scoreIf you find an erroneous entry on your file, you should contact the creditor in the first instance. If that fails, contact the ICO.

The most common types of error are duplicate entries for a single account and wrong default dates, often recorded by debt purchasers who, in a number of occasions, reset the default date to the time when they bought the account. This is incorrect and should be challenged.

A default reflects a debtor’s conduct with the account. Even if the account is unenforceable due to lack of a proper agreement, the default will remain on record, however, a recent judgment established that, if an account has been declared unenforceable in court, then the default should be removed.

The sharing of data with the credit reference agencies is governed by the Principles of Reciprocity. See SCORN online for more information.

Reporting principles
Introduction

This section sets out the overall objectives and background to the credit referencing system and the data processing principles surrounding it.

Credit Reference Agencies (CRAs) hold databases of debts and payments on products offered to consumers and businesses that relate to financial commitments. These will include credit agreements such as mortgages, loans, credit cards or current accounts, and commitments such as telephone agreements, energy and water utilities.

Information about the limits, balances and how these agreements are managed, are shared by the provider with CRAs. They in turn can provide a copy of your credit reference file to other organisations to be used by them to help make decisions about you or your business (if you have one). Your credit reference file may only be used for agreed and specific purposes.

You can see a copy of your credit file on request and on payment of a minimal fee. There is specific legislation which sets out what must be supplied and how quickly the file must be sent to you.

Principle 1

1. Data that is reported on your credit file must be fair, accurate, consistent, complete and up to date.

Lenders that supply data to the CRAs are required to ensure that the data is accurate, up to date and meets agreed quality standards.

The types of product that are reported all relate to forms of credit, but the features of one product type may be very different to another. Rules are in place to ensure that arrears information from different providers, but on the same product type, has the same or a similar meaning.

Rules are also in place to require that the reporting of information on different products is provided in such a way as to mean the same, irrespective of type.

For each product type there are required levels of data (mandatory fields) that must be supplied in order for the data to be loaded and/or updated.

Whilst most credit products are repaid monthly, some are not, such as home credit1. In these cases, the information will be adapted to meet the monthly reporting standards of the credit reference industry.

Should your account be sold or referred to another lending organisation or a debt collection agency, the record(s) provided to a CRA by the creditor/and or purchaser must still be accurate and up to date. In all instances you should be told whether and how the information will be reported on your credit file.

Principle 2

2. Should a payment not be made as expected, information to reflect this will be recorded on your credit file

If you do not make your regular expected payment by the agreed time and/or for the agreed amount according to your terms and conditions, the account may be reported to the CRAs as being in arrears. If this continues over time, the level of reported arrears will increase, which may result in the lender taking some form of action. This could include notification of their intention to report the account as “defaulted” (see Principle 4 below).

Calculating and reporting arrears

In general, the reporting of arrears is designed to indicate that the expected payment, whether a fixed sum (as in the case of many products) or required minimum (in the case of credit and store cards), has not been paid according to the terms and by the due date. The purpose of reporting arrears is to indicate at the earliest reasonable opportunity that a customer is showing signs of potential financial difficulty. Arrears are reported as missed payments through status codes such as 1, 2 etc which are based on the number of months missed. Generally by the time the account is 3 months in arrears, the lender may be taking further action such as reporting the account as defaulted (see Principle 4 below). Missed payments may continue to rise and be reported up to a maximum of 6. On some products this may continue to show as 6 until the lender takes action and reports the account as being in default.

Current balance

This information relates to the amount owed at a given point in time. It may be made up of a combination of the amount borrowed, interest and charges depending on the terms of the product. Due to the nature of some revolving products, the current balance (owed) may show as zero even though the account is still active e.g. mobile phones, credit cards and mail order.

Reporting of arrears over time

Arrears should generally only increase by one month at a time e.g. status code 1 to 2, 2 to 3 etc. There can be exceptions to this such as fraud, bankruptcy, county court judgments (CCJs), returned cheques or direct debits. In the event that repayments are made and the arrears reduce, the change in arrears status should be recorded in the next monthly update. In contrast to the reporting of increasing arrears, reducing arrears may legitimately “jump” status codes if significant payments are made and/or capitalisation occurs (see Principle 3 below).

Principle 3

3. If you offer or make a reduced payment, how it is reported will depend on whether it is agreed with the lender.

Agreed reduced or revised payments

If, due to financial difficulty, your lender agrees a reduced or revised payment with you, this will be reflected on your credit file. How revised or reduced payments are shown on your credit file will depend on whether it is a temporary or permanent change to the agreement. The account may or may not be in arrears at the time of the change.

Should a permanent change in the payment terms be agreed by the lender, there will normally be a new agreement signed and the revised terms will be reported going forward. This may mean that a new limit, account and/or term is shown on your credit file and performance will be reported against that going forward.

As long as you comply with the revised terms, arrears will not accrue further or be shown although any arrears reported under the previous terms will stay on your credit file.

Should a temporary reduction in the payment amount be jointly agreed between you and your lender, this ‘arrangement’ will be recorded at the CRAs. This may also occur if there is a temporary change in terms (that is not part of the product) such as a payment holiday or change to interest only.

Depending on the period and amount of the arrangement, arrears may continue to be reported. Such temporary arrangements may last for some time but are generally expected to revert to the contracted terms at some future point. For such accounts arrears may continue to be calculated in accordance with the contracted terms.

The record must show that the account is the subject of special terms. The reporting of this fact may be different depending on the product and the CRA.

It is important that you are made aware w hen such arrangements are made and maintained, that it will show on your credit file and that whilst arrears may accrue and increase, a default will not be recorded.

Following a satisfactory period of payments under a temporary arrangement, and if the lender agrees, the status on your account may be set to zero; although the history will remain. This can be described as capitalisation, re-scheduling or re-aging. Depending on the product this could result in adjustments to how your account is reported on your credit file e.g. the payment amount, repayment period as well as the status. Should you make full payments from this point onwards your account will be classified as being up to date.

If after a period of time a permanent change in terms on an account occurs then if appropriate, the revised terms should be recorded at the CRAs and payment performance calculated against the new terms; in such circumstances there will no longer be an arrangement in place.

If your lender agrees to give you a temporary arrangement, but you fail to make the agreed payment against the new terms, they may still file a default (see Principle 4 below) as soon as a payment is missed, as long you were at least 3 months in arrears on the original agreement.

If you are subject to a debt management programme managed by a third party (such as StepChange) this will be shown on your credit file so that lenders know you are subject to this type of arrangement.

A debt management programme (DMP) is when a third party debt adviser negotiates a repayment schedule for all or a number of a consumer’s credit agreements.

Debt Management Programme

If the plan is accepted by the lender, the record filed at the credit reference agencies must reflect that the consumer is on a DMP. For such accounts arrears may continue to be calculated in accordance with the contracted terms, but the account marked as under a DMP.

Unacceptable or Token payments

If your lender does not agree a reduced or re vised payment with you because the amount you offer to the lender is not acceptable, for example, a very low or token payment, the account will not be reported as an arrangement. Any payments you make will be reflected in the current balance, arrears will continue to accrue and a default may be recorded.

Principle 4

4. If you fall into arrears on your account, or you do not keep to the revised terms of an arrangement, a default may be recorded to show that the relationship has broken down.

As a general guide, this may occur when you are 3 months in arrears, and normally by the time you are 6 months in arrears. There are exceptions to this which may result in a default being recorded at a later stage, such as secured or long term loans e.g. mortgages, or if the product operates in a more flexible way e.g. current accounts, student loans, home credit.

If an arrangement is agreed (see Principle 3 above), a default would not normally be registered unless the terms of that arrangement are broken.

Apart from being 3 or more months in arrears there are other circumstances which may lead to the recording of a default:

  1. Property such as a house or vehicle has been repossessed or handed back with no indication to pay a remaining balance.
  2. The provider takes steps to cut off a service.
  3. The account is in arrears and the provider receives an indication that you have left your address without notifying them.
  4. Evidence of fraud.
  5. The account is or has been included in a bankruptcy, CCJ, Individual Voluntary Arrangement (IVA) or similar.

The lender must have notified you of their intention to register a default against you at least 28 days before doing so, in order to give you ti me to make an acceptable payment or reach an agreement with them on an arrangement. This also applies in cases 1 – 3 above. However, in 4 – 5 the lender or provider does not need to provide a notice and can file a default as soon as they become aware of the situation.

Lenders will report the default amount and the default date to the CRAs.

The current balance then shows the actual amount due (which may include interest and charges) and must be updated over time until the account is satisfied (settled).

A default will remain on your credit file for 6 years from the default date.

A default should not be filed:

  • If you make a payment, in time, that fully meets the terms set out in the default notice
  • If jointly with the lender an agreement is reached for an arrangement and you keep to the terms of that arrangement If the amount outstanding is solely made up of fees or charges
  • If a lender is given evidence that a customer is deceased (for example a verifiable death certificate, probate or letter of administration)

The date of default recorded on the file would normally be the date on which a decision to file a default becomes effective, e.g. 28 days from the date of the default notice.

The default amount filed should normally be the balance amount as quoted on the default notice. However, if any payments or charges apply in the interim period, the default balance reported may reflect the outstanding balance at that time.

The current balance should be updated regularly and reflect any charges added and/or subsequent payments received whether direct to the lender or via a third party organisation (debt collection agency) or, for example, as a result of the sale of a repossessed asset.

Relationship of defaults to CCJs, decrees, bankruptcies, IVAs and similar arrangements

A default can be registered for debts which the lender has also tried to recover through a CCJ or decree.

In normal circumstances lenders will be notified when the debt that is owed to them is to be included in an insolvency e.g. bankruptcy, IVA or similar and should be marked as included in that by filing a default as soon as is practical.

The default date must be consistent with that of the CCJ/bankruptcy or IVA; therefore a default should be filed as being no later than the date of the insolvency order. In circumstances where the lender is not immediately aware, the default can be filed at that point in time.

If evidence of the insolvency date is provided, the default date recorded at the CRA will be aligned. If a default has already been filed and a CCJ or other insolvency or similar is subsequently registered, no further action is needed.

Where there is joint liability and only one party is the subject of an insolvency order, then the account should not automatically be marked in default if it is being maintained by the other party.

Despite what the guidance states about not placing the debtor in a worse position, arrangements to pay and DMPs often result in defaults being registered much later than in cases where no payments are made.
Principle 5

5. When an account is closed, the record should properly reflect the closing payment status of the account and any agreement between the parties

If you make a full or part payment and no further money is expected, the account should be closed unless you have agreed with your provider to continue your relationship. If the account is to be closed, your record should be marked as fully paid if:

  • You have paid the money owed in full
  • CCJ or decree was granted and you have paid in full the money owed as determined by the court Your record should be closed and marked as partially settled if:
  • he lender accepts final settlement of the account for less than the balance outstanding
  • Your account is included in an insolvency such as a bankruptcy or IVA which is discharged/completed and less than the full amount is paid The fact that the account was previously in defau lt will remain on your credit file for 6 years from the date of default. If the account was not in default, the record would remain on your credit file for 6 years from the date of closure.
How to complain
Where there is a problem with the content of a CRA record, you should contact the organisation concerned to give it an opportunity to put things right. If that fails, you can contact the ICO helpline on 0303 123 1113. Please note though that we can only deal with issues to do with the accuracy etc. of your record, not with lending decisions based on it.
National Hunter database
Red flaggedNational Hunter is a little known database set up by lenders in 1993 with the idea of preventing fraud. Unlike credit reference agencies, companies don’t usually notify people when an entry is made on this database, where data also remains for up to six years.

The data held by National Hunter is not the same as the CRA data, it contains records entered by lenders when they have concern regarding credit applications and it can flag up inconsistencies between applications, for example if your previous employment details, salaries or addresses don’t match between various credit applications.

This register can stop you from being approved for credit and holds over half a million entries. Unlike CRAs, the only way to obtain the data held by National Hunter is to send a Subject Access Request (with a £10 fee) but there is no dispute resolution mechanism, any arguments have to be taken up with the lender who would decide whether to amend the records accordingly.

If you wish to send a Subject Access Request (SAR) to National Hunter you’ll need to send this form with a £10 cheque or postal order.