Arrears

Definition

If you fall behind on your credit repayments this is referred to as being in arrears. The term can be applied to any contract where regular payments are required, such as car finance agreements, bank loans, rent payments, and mortgages.

Arrears can be expressed in two ways. Either by the amount owed (e.g. £200 in arrears) or by the number of missed payments (e.g. two months in arrears).

Is it bad to be in arrears? 

When a payment is due before the service is provided, such as a car lease or a property rental, being in arrears means you have failed to make a payment on time and is, therefore, something you should always do your best to avoid.

However, if your contract requires a payment to be made after the service has been provided, for example, utility bills, this is referred to as paying in arrears and it’s not something to be concerned about. That being said, you must always ensure the amount owed is settled before the payment due date.

Will being in arrears affect my credit rating?

Some people fall into arrears as a result of forgetting to make a payment, whilst others simply may no longer be able to pay off the owed amount. Either way, being in arrears can negatively affect your credit rating.

Generally speaking, one or two late payments won’t have much of an impact, however, if you are two months in arrears, i.e. you have missed two payments in a row, this will likely have a notable impact on your credit score and make it harder to get accepted for credit in the future.

What should I do if I am in arrears?

Should you fall into arrears, it’s important to get your payments back on track as soon as possible. If for any reason you are unable to pay off your arrears, you will need to contact your lender and explain your situation. 

In some cases, lenders may be happy to devise a payment plan to help you repay the debt. This may involve temporarily reducing your payments to a rate you can afford, or in some cases freezing your payments for a limited period. However this is dependent on the lender and the type of agreement. 

If you fail to make contact with your lender, or you are unable to reach an alternative payment plan, you’ll receive a default notice (usually after three or more missed payments). 

Once you default on your loan, the lender can take further action to collect the debt. In a car finance agreement, this could be reclaiming the vehicle or issuing a County Court Judgement (CCJ). Defaulting on your loan can seriously affect your credit rating and your eligibility for credit in the future, so it’s vital you take the necessary steps to prevent this from happening.

At Creditplus, we understand an individual’s circumstances can change unexpectedly. That’s why we will always do our very best to work with you and help get your payments back on track.