Defaults can have a significant impact on your credit score, affecting on your ability to get other loans or a credit card or could result in you paying higher interest rates. When assessing your credit report defaults are one of the major issue’s lenders look for when you apply for credit. So, it’s important that you understand what a default is, and how to avoid them by making sure you make your repayments on time.
A default, which basically is when you fail to repay a debt, can remain on your credit report for five years, even if you have paid off the original debt.
What is a default?
There are two types of credit defaults. A Consumer Default, and a Commercial Default. The information we provide here is for consumer defaults only. If you require information on commercial defaults, please contact us, and speak with one of our credit experts, who will happily provide you with the specific information you require.
A default on a consumer credit account occurs when you fail to make a payment for an agreed debt for such things as a mobile phone bill, credit card repayments, loan repayments, electricity, gas, water, or any other utility.
However, just failing to make a payment does not automatically result in a default. The regulations on when a late payment becomes a default, and when it can be listed as a default are very specific. In brief, the payment has to be:
✓ worth at least $150
✓ at least 60 days overdue.Before listing a default, the credit provider must take a number of steps, including sending two separate written notices to your last known address requesting payment stating that the debt may be listed with a credit reporting agency (such as Equifax).
How does a default affect my credit score?
Defaults can have a significant impact on your credit score, affecting on your ability to get other loans or a credit card or could result in you paying higher interest rates. When assessing your credit report defaults are one of the major issue’s lenders look for when you apply for credit. Even if you have repaid the debt, defaults can last on your credit report for five years.
A lender might not automatically reject your application for credit if you have a default on your credit report. But the higher number of defaults the less inclined the lender will be to approve your application. This is because they perceive you to be of higher risk of defaulting on other loans. Even if you are approved for credit, it is likely that it will be very limited and you will not get offered the best deals, and are certain to face increased interest rates to cover the lenders risk, costing you more money. For this reason, it’s a good idea to avoid defaults getting onto your credit report.
How long does a default stay on my credit report?
The bad news doesn’t stop there. A default listing will remain on your credit report for five years, even once the amount has been paid in full. This shouldn’t stop you from paying though as your credit report will also include your history of paying it.
What will be listed on my credit report?
When a lender lists a default on your credit report, the following information will be included:
✓ The lender’s name and what type of account it was.
✓ The amount that is listed as a default.
✓ The date the listing is due to come off your report.
Will paying my overdue account remove the default?
The bad news is no. Paying the account will allow for the status of the listing to be amended to “paid” or “settled”, whilst lenders will look favourably on paid defaults, in today’s tough financial markets this change in status is unlikely to make a great deal of difference to the borrowing potential of a consumer. A default listing will remain on your credit report for five years.
How can I remove a default from my credit report?
You can only get a default actively removed from your credit history when a mistake has been made, or it is incorrect, or by waiting the duration until it is cleared from your report (until the 5-year period is up).
If you identify an default that you do not think belongs to you, on your credit report, you can contact the credit reporting agency to have it removed. If you are not comfortable doing this yourself, you can enlist the help of our professionals who have a relationship with the agencies.
To protect consumers, creditors must adhere to specific requirements when reporting defaults. Fix Bad Credit’s credit experts work closely with our legal team, who have a vast experience and the understanding of these legislative requirements and compliance required for a default to be accurately listed. With over 8000 pages of legislation, over 200 compliance points that need to be checked, and over ten (10) years of experience in the industry, we are experts at identifying where mistakes have been made and assisting you to remove inaccurate defaults from your credit report.
How many points will my credit score increase by once the default is removed?
This is a very common question, and unfortunately there is no exact answer.
Your credit score is based on the personal and financial information available in your credit report. Each credit reporting agency uses a slightly different algorithm to calculate your score and use varying credit score ranges. Each agency may also hold different information about you. As a result, your credit score may vary depending on which credit reporting agency has calculated it.
Your credit report is based on information available from lenders (such as banks, credit unions and payday lenders), as well as any public record information (for example, any court judgements) available at the time. It may also include information from telecommunication and utility providers about any defaults or credit advances. The algorithm used to calculate your credit score typically considers such details as:
✓ The credit or loan products you have held in the past, including the credit provider, the type of product, the opening and closing dates of the account and your credit limit details of the applications you’ve made for credit or a loan, including the number of applications, as well as the type and size of the credit or loan you requested.
✓ Your repayment history, other overdue accounts, and defaults.
✓ Information about any court judgements, bankruptcy or personal insolvencyThese factors are taken into account when calculating your credit score. For example, if you applied to multiple credit providers in a short space of time, this may signal that you are in credit stress and may negatively impact your credit score. According to reporting body Equifax, this flags you as a greater risk than someone who has made infrequent applications for credit with only a few credit providers.
See How My Credit Score is Calculated to get a better understanding.