How does a default affect your credit score

Jul 2, 2024

We go through situations in life that can bring financial hardships like medical costs or at times, losing a job, which makes managing debt tough. Therefore, a default occurs in our credit report when a lender terminates your account because you have outstanding balances or to meet a debt obligation, such as electric bills, mobile phone charges, credit card payments, or home loans. When loan or bill payments are missed, creditors report the default to credit agencies. The report comprises the unpaid balance, plus the interest or fees, minus any further payments made. This information is available to other lenders who examine your credit score. In this blog, we will discuss how does a default affect your credit score and how to minimise the consequences of a default on our credit record.

Types of Default

In this section, we will have a look at the types of defaults.

Paid Default

This is the kind of default when you have missed payments on a loan, but you have eventually caught up and paid off the full amount.

Unpaid Default

Unpaid default is when you have missed payments on a loan and have not made any effort to pay off the debt. Defaults remain on your credit report for seven years.

Settled Default

The default is considered settled when you have come to an arrangement with the credit provider to pay some of the amount in return for the lender not pursuing the remaining debt.

What consequences do defaults have on credit scores?

People with multiple or large defaults are placed in lower credit bands, which can result in higher interest rates or credit application denials. Likewise, people with lower defaults have good credit ratings. This can limit a person’s capacity to make large purchases, such as a house or a car, or even obtain a credit card for regular use. Defaults can have the following consequences:

  • A default can damage to your credit score.
  • You can have difficulty getting authorised for loans or other forms of credit
  • There can be increased interest rates on future loans.
  • There can be a confiscation of your property or salary.
  • Legal action can be taken against you.

How long does a default stay on your credit file?

When you miss payments on a debt of $150 or more for more than 60 days, your creditor may show a default on your credit report. They must notify you of the overdue payment before initiating this action. You will get a message regarding it, followed by another at least 30 days later. The second notice advises that failure to pay within 14 days would result in the default being reported.

Failure to reach you may result in a “clearout” on your record, which is a more serious issue that will remain on your credit report for seven years rather than the customary five for routine defaults.

Once a default has been deleted, the lender cannot relist it, even if the debt is still owed. However, You must make timely payments to keep court judgements off your credit report.

If your debt is moved to a collection agency, this should be properly stated on your credit report to avoid duplication entries. It is best to keep the original default date and outstanding balance unchanged to prevent additional costs or delays in processing the default.

How can you remove defaults yourself using free sources?

You may file a complaint directly with the credit reporting agency or credit provider. Or you can hire a credit repair company to handle the process. You can also improve your credit score by removing the default yourself. Follow these techniques to address this issue:

  • Get your credit report to figure out the details of the negative listing.
  • Learn about Australian credit legislation.
  • You need to determine the legal basis for contesting the default.
  • Gather proof for your case and contact all relevant parties, including credit reporting agencies.
  • If you are not getting results for your effort, you may need to take your case further to the appropriate authorities.

In Australia, there are several free government resources to help you fix your credit report and remove defaults.

Tips to Minimise the Impact of Default

You can use the following strategies to reduce the impact of a default on your credit score:

  • You should only borrow the amount you can afford to repay. Checking your income and expenditures to create a budget will help in this regard.
  • Make all payments on time. Pay your bills on time every month, even if it is only the minimum amount.
  • Try to understand the terms of your loan, including the interest rate, fees, and payment schedule.
  • If you are unable to make a payment, contact your lender and explain your situation so that you can work out a payment plan that works for you.
  • Make prompt payments on your bills. Once settled, the default status changes to “satisfied.”
  • As the default matures, after a few years, getting credit approval may get easier.
  • Set a budget and stick to it. Don’t spend more than you earn.
  • Make more than the minimum required payment. It will help you pay off your debts in a short period of time and save money on interest.
  • Merging your bills with higher interest into one to save money with a reduced interest rate.
  • Get the help of a credit counsellor to help you construct a budget, negotiate with your creditors, and develop a debt-reduction strategy.

Can I acquire a loan or mortgage if my credit history includes a default?

When you apply for a loan, credit providers may analyse your credit history to calculate your chances of repayment. A default indicates that you have previously struggled to repay credit, which might reduce your chances of getting a loan, particularly for mortgages. Mortgage lenders have to comply with strict affordability standards.

However, you can still get credit despite a default on your record. There are solutions available expressly for people with bad credit, usually with higher interest rates and smaller borrowing limits. Before applying, make sure you can comfortably make the monthly installments.

Can my employers see my default?

Generally, your employers will not be aware of your default unless they have access to specific credit data from organisations that provide this information. Companies typically review public records such as county court judgements and bankruptcies. However, if you apply for a specific job with a lender or credit reference service, they may ask for your consent to run a credit check, which will expose any defaults.

Responsible Credit Habits

  • Pay bills on time
  • Maintain low credit utilisation
  • Avoid closing paid-off accounts
  • Limit new credit applications.

Getting Help

Do not allow credit defaults to stop you. Contact a credit repair firm immediately to receive premium services, or use the free resources offered by the Australian government to remove defaults from your credit score and take the first step towards a better financial future. How may it be useful? Let us have a look:

  • A Credit repair company handles the entire matter, saving you time and effort.
  • The professionals concentrate on eliminating defaults, which increases the chances of success.
  • A Reputable firm provides a money-back guarantee for credit repair.
B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.<

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    Disclaimer: The information in this article is general in nature as it has been prepared without taking account of your specific objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.