Why does being conscientious and creating ARs result in a more punitive outcome than defaulting?

BigBoss

I had an AR for half-payment for three months in 2021 while a student. I then paid the balance off in full. Prior to digging deeper on here, I was always of the impression that if you can't afford to pay in full, you should always come to some sort of arrangement with the lender. It now turns out that it was more sensible to just allow the account to default as this disappears from the credit file after 6 years. Why is being conscientious in difficult times punished? 

bleepbloopblorp

BigBoss said:

I had an AR for half-payment for three months in 2021 while a student. I then paid the balance off in full. Prior to digging deeper on here, I was always of the impression that if you can't afford to pay in full, you should always come to some sort of arrangement with the lender. It now turns out that it was more sensible to just allow the account to default as this disappears from the credit file after 6 years. Why is being conscientious in difficult times punished? 

Because it stays on your file for longer.

Ultimately the answer is that they know about your wrongdoings for longer, so can use that data to consider you a risk for longer.  If your file is wiped clean, at worst you have no file, but likely you have 6 years of running your bank account properly.

Badgerwood15

I agree BigBoss. It feels completely unfair! I do appreciate everything Stepchange did for me in setting me up with a DMP in 2013 but a bit of advice around the pros and cons of making sure a default is registered when paying via an arrangement, DMP etc would have been so helpful. I am potentially looking at 10 years not 6 of being financially blacklisted which seems massively wrong and virtually exploitative behaviour by the financial sector.

sourcrates

It really stems from FCA guidance for the treatment of customers in debt.

In February 2021, following 2 consultations, the FCA published guidance on the fair treatment of customers in debt. This Guidance sets out the action's firms should take to treat vulnerable customers fairly. 

Arrangements to pay were seen as being preferable to defaulting an account, especially if the customers problems were only to be short term, however those with long term debt problems could possibly lose out under this guidance, due to the fact that in long term debt management a default would long since have dropped off your file, by the time your debts were repaid.

But "AP" markers will stay on your file for 6 years from the account settlement date.

So, there are winners and losers here, but this is the main reason why some creditors do not default you, or delay defaulting you, they don`t want to get a fine, and a write up from the FCA.

That`s it in a nutshell, they are just following the rules that are set for them.

Badgerwood15

sourcrates said:

It really stems from FCA guidance for the treatment of customers in debt.

In February 2021, following 2 consultations, the FCA published guidance on the fair treatment of customers in debt. This Guidance sets out the action's firms should take to treat vulnerable customers fairly. 

Arrangements to pay were seen as being preferable to defaulting an account, especially if the customers problems were only to be short term, however those with long term debt problems could possibly lose out under this guidance, due to the fact that in long term debt management a default would long since have dropped off your file, by the time your debts were repaid.

But "AP" markers will stay on your file for 6 years from the account settlement date.

So, there are winners and losers here, but this is the main reason why some creditors do not default you, or delay defaulting you, they don`t want to get a fine, and a write up from the FCA.

That`s it in a nutshell, they are just following the rules that are set for them.

Thanks for this context. Out of interest how did the FCA approach things prior to the ruling in 2021 especially re defaults and markers ? I have just tried to google it but nothing clear is coming up.

sourcrates

It usually meant accounts were defaulted much sooner, FCA only takes action on rare occasions, so creditors just followed whatever previous guidance would have been.