Default

What default means

A default is the point at which a lender formally concludes that the relationship with a borrower has broken down because the agreement is not being honoured. In UK consumer lending it is typically triggered when an account falls a number of months into arrears, commonly around three to six months of missed payments, though the precise trigger depends on the product and the lender's policy. At that point the lender records a default, which closes the account to further borrowing and starts the recovery process.

Default is distinct from occasional late payment. Missing a single payment is an arrears event; a default is the lender's judgement that the debt is unlikely to be repaid under the original terms. It is a significant step with lasting consequences for the customer, so it should be reached fairly and with appropriate forbearance considered first.

It is also worth separating the account-level default from the legal remedies that may follow it. Defaulting an account is the lender's own record of a broken agreement; pursuing the debt through the courts, which in England & Wales can lead to a County Court Judgment, is a further step the lender may or may not take. The two are related but not the same, and a customer can have a default on their file without a judgment ever being sought.

How a default is recorded and reported

When a lender defaults an account it reports this to the credit reference agencies. A default stays on the credit file for six years from the date it was recorded, regardless of whether the debt is later repaid. This is a long shadow: it affects the customer's ability to obtain credit, and often the price of any credit they do obtain, throughout that period.

Before defaulting a regulated agreement, a lender must usually issue a default notice giving the borrower the opportunity to put things right. The customer is entitled to be told clearly what is happening and what the consequences are. Lenders should also consider whether the arrears reflect a temporary difficulty that forbearance could resolve rather than moving straight to default.

Default in credit-risk modelling

Default also has a technical meaning in how lenders measure and price risk. The probability of default is one of the core parameters of credit-risk estimation, alongside exposure at default and loss given default. A lender's scorecards and provisioning models are built to predict how likely each account is to reach this state, and portfolios are monitored for rising default rates as an early sign of stress.

Because default carries both a regulatory-reporting meaning and a modelling meaning, lenders need a consistent definition across the business. If collections, reporting and modelling disagree on when an account has defaulted, the result is mispriced risk and inconsistent treatment of customers. A rising default rate is one of the clearest early-warning signals a lender has, so the integrity of that figure, and confidence that it means the same thing everywhere it is used, directly affects how well the business can see trouble coming.

Treating customers fairly around default

Under the Consumer Duty and CONC, a lender must treat customers in financial difficulty with forbearance and due consideration. In practice that means engaging early, exploring affordable arrangements, signposting free debt advice and only defaulting an account when it is the right and fair step. Rushing to default a customer who is in temporary difficulty, or one who is vulnerable, risks causing foreseeable harm.

Good data supports fair treatment here too. Open Banking and up-to-date affordability information can help a lender tell the difference between a customer who has stopped paying and one who genuinely cannot, and to shape a realistic arrangement. Handled well, the period before default is an opportunity to rehabilitate an account; handled badly, it accelerates harm and loss for both sides.