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How defaults affect your credit score

Defaults on your credit report can be scary. Find out how you can clear a default.

09 February 2024Lloyd Smith 7 min read
How defaults affect your credit score, rating, history, how to remove a default

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Missing a scheduled debt payment is bad news for your financial health.

Not only does it bring down your credit score, but it also creates significant financial challenges when your account is marked to be in default. This article tells you how default affects your credit score and how to remove the default. You will also learn how to clear credit history legitimately.

Defaults occur when you miss payment obligations of a loan, credit card dues, or utility bills. There is no minimum amount for default in Australia. It can be only $1 or run up to thousands of dollars.

The moment you miss making a payment by the due date, your account is delinquent. The consequences of being delinquent include paying late fees and default interest. The lender also makes attempts to collect the amount due.

Your account can be delinquent if the amount remains unpaid for anywhere from 30 to 90 days or even longer. Thereafter, the lender marks it to be in default. And how long does a default stay on your credit report? The entry can stay for 5 years.

The immediate impact of defaults on credit file is finding it challenging to get approved for new credit. Since lending is a high-risk business, every lender wants to ensure the borrower repays on time, and that’s why they check defaults on credit files to know more about their repayment history.

The impact of default varies depending on the amount and type of loan you intend to borrow and applicable laws. In all cases, there is a negative consequence, and here’s a breakdown of what are defaults on credit report for different types of loans:

Mortgage loan

A mortgage loan is in default if the mortgage amount remains unpaid for 30 days. When the amount remains unpaid for 3 to 6 months, the lender can initiate foreclosure proceedings to sell the property and recover the dues.

A foreclosure event features on your credit report for seven years, beginning from the first time you miss a mortgage payment, ultimately resulting in foreclosure.

Auto loan

If your loan instalment payment is delayed by 30 days, the lender can issue a default notice in Australia for your auto loan. This also triggers repossession and gives lenders the right to seize your vehicle to set off your obligation. A collection agency may also be appointed to recover additional unpaid debt, if any.

Repossessions and collection accounts feature on your credit report for seven years.

Personal loan

If you fail to repay an unsecured loan, default can be marked when it remains unpaid for 30 to 90 days for the personal loan. The timeline varies depending on the lender.

Usually, such accounts are transferred to a collection agency, and you can expect recovery proceedings to be initiated against you. Can a debt collector list a default? Yes, if your debt remains unpaid. You can either pay it off or negotiate a settlement.

Student loan

How long it takes for unpaid student loans to default depends on the type of loan and loan provider.

If you have borrowed privately, missing a single payment can push it into default based on the terms and conditions of the lending. If your loan was provided by the Government, the time limit might vary depending on the type of aid provided.

Credit cards

If your credit card dues remain unpaid for 6 months, it leads to a charge-off. A charge-off is always bad news for your credit file as it indicates that the creditor has tried and failed to recover the debts and has been forced to close your account. The lender can sell your account to a collection agency that may initiate proceedings to recover the debt.

A default can impair your borrowing ability, and how to clear a default on credit history in Australia is a question that plagues several borrowers. Here’s what you need to know about how to clear credit history:

You can only remove a default that has been erroneously recorded, for example:

  • If there is proof that the recording was incorrect, as you have paid the debt
  • If there were procedural inaccuracies and the lender did not follow the due process before marking an account to be in default
  • If you can demonstrate that default is disputable for other reasons, such as a loan extended in violation of responsible lending obligations

So how to find out what defaults you have? You can get a copy of your report from a credit rating agency and go through the entries. The default status is clearly indicated on the file.

Here’s how to remove a default from credit file when there is an error:

  • Download your credit report and locate the default entry
  • Raise a dispute online or by writing to the credit reporting body and explain why you are disputing it and why it should be changed
  • The credit reporting agency will contact the relevant lender to check the accuracy of your claim. Some may even add a ‘Notice of Correction’ to your credit report to let other lenders know that the entry is disputed
  • If the lender agrees that the entry is incorrect, your credit file will be updated. Make sure to download a copy of the updated file.

Can credit corp remove the default on its own solely based on your request? No -- the credit report is prepared based on information shared by the lenders. Any correction requires confirmation from the data provider. How to remove default from credit file in Australia if you don’t want to approach a credit reporting agency? You can contact the lender directly to raise your grievance.

Several credit repair companies heavily advertise how they can remove defaults on credit files in Australia. You must exercise extreme caution if you are planning to approach them. Since they are unlicensed, there are no industry standards to be followed. They cannot remove credit defaults unless there has been an error in recording them. Most charge a significant amount upfront and promise to clean up your credit file completely. In reality, their powers are limited regarding default removal in Australia.

Want to clear my credit history for free in Australia? Your best bet is to do it on your own through the credit rating body.

How to get a loan with unpaid defaults is a key concern for most borrowers, as default directly impacts your ability to borrow. Defaults on your credit report signal to the lender that you are not responsible with handling credit, and there’s a chance they may not get repaid.

Several lenders in the market exclusively cater to borrowers with bad credit histories and credit defaults. You can consider applying for specialised products such as bad credit loans or no credit check loans.

You can also opt for a secured loan, as the collateral reduces the lending risk. However, these loans are priced higher than regular loans since lenders need to square off their risk. In any case, make sure you can afford to repay the loan or mortgage you plan to take -- taking on more debt and defaulting on them will only bring down your score further. Timely repayments can improve credit score and reduce the impact of previous defaults, making you a more desirable candidate in the future.

Usually, employers can't know about your credit defaults as credit rating agencies share the information only with those organisations that provide credit data.

If you are applying to work with a bank or a credit rating agency, your credit information may be reviewed as part of the application process. If you have any loan defaults, they may get flagged.

Otherwise, employers only review publicly available data through the bankruptcy court and County court.

How long does a default last on your credit report? Unless erroneously recorded, credit defaults stay for 5 years. As such, you cannot undo it, but you can reduce the impact. Here are some tips:

Repay as soon as you can

Repaying the outstanding dues should be the first step to take once you know a credit default has been recorded in your credit report. Paying off the dues results in credit rating agencies marking ‘satisfied’ against the default, which is a better look when you are applying to new lenders.

Add an explanation

Certain credit rating bodies permit borrowers to add a note to their credit report, explaining the circumstances that led to the default.

Does hardship affect credit rating? Yes, as it can make it difficult for you to service your debt on time. Compelling circumstances such as losing your job due to the pandemic or long-term illness can help lenders understand why your debt remained unpaid.

Give it time

Over time, the severity of the default reduces. Even though you may find it difficult to qualify for a loan due to a freshly recorded default, the situation may change in a few years as the default become less important for the lender.

How many points does a default affect your credit score depends on a host of factors, such as what your score was when the first default occurred, how many negative events have been recorded on your credit report since then, and how recently they have occurred.

Depending on the credit scoring body, a default can reduce your score by up to 350 points. On average, County court judgments can knock off 250 points, and missing payment obligation can strike off about 80 points. Payment history has the most significant impact on your credit score. So if the default continues, you risk losing more points. For instance, a 30-day delay in making payments can reduce your score by 100 points.

Since default impacts credit score, your options to borrow a loan are limited.

The best way is to approach lenders you have an existing relationship. But be prepared to explain why you defaulted and back it up with evidence. As a lending policy, lenders look at your defaults in their entirety, assess the amount, and check how long ago the default happened before approving an application.

A default stays on your credit file for 5 years from the date of missing your first payment. Even if you pay off the outstanding amount eventually, the default remains. Can a default be listed twice? After 5 years, once the default is removed, your lender can’t re-register it even if the amount is unpaid.

And how much will credit score increase after default is removed? In most cases, you are unlikely to have only one default on your credit file. Dropping off one default doesn’t make much difference to your credit score till you have additional defaults on your file. Only when all the defaults are removed can you expect real improvement in your credit score.

Now that you know the impact of default on credit rating, ensure to repay your dues on time. Keep checking your credit score periodically to see how a default may have affected it. You should also check credit reports regularly to ensure defaults aren’t incorrectly added on your report.

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Key Highlights

  1. A default happens when a borrower is late making a repayment or when a debtor fails to make a repayment altogether.
  2. They're are one of the major variables lenders look at when you apply for credit.
  3. The higher the number of defaults on your credit report, the less inclined the lender will be to approve your loan.
  4. Create a free ClearScore account to check your credit score and report.

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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.