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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.

02 February 2022Lloyd Smith 9 min read
How defaults affect your credit score, rating, history, how to remove a default

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If you have ever used a credit card or applied for a loan, then, you have a credit report. A credit report is a financial document consisting of all the pertinent information about your spending habits and repayments, which allows credit providers to assess your level of risk as a borrower, and decide whether or not they will grant your loan application, and if so, at what interest rate.

The information on your credit report includes money you have borrowed, the number of credit applications you have made, and whether or not these are paid on time. Credit scores, or ratings, are usually scored between zero and 1000, or in some cases 1200 (this depends on the company), and is based purely on your financial activity i.e. whether you make payments on time, whether you have outstanding balances etc.

There are good and bad credit scores, but the rule of thumb is that the higher your credit rating, the better reputation you have with money lenders and the more likely you are to have loans approved, receive better deals and preferable interest rates.

A default happens when a borrower is late making a repayment or when a debtor fails to make a repayment altogether. A debtor is someone who owes money. Not making repayments can have serious ramifications and may impact your ability to get a loan down the track.

Defaulting on a repayment may be recorded by a credit reporting body such as Experian if the payment is more than 60 days late, for debts valued at $150 or more. Lenders must follow a number of steps before they notify a credit reporting body of a default.

For instance, an individual must be notified twice before a creditor can ask the credit reporting body to record the default on the borrower’s credit report. In the first instance, the lender must tell the debtor when the repayment is overdue to ask for the payment to be made.

The creditor can send a second notice asking for the debt to be repaid. At this stage, the creditor must notify the debtor it can let a credit agency know if the debt remains unpaid. Then, the lender can send a second notice. After 45 days it can tell a credit reporting body if the borrower doesn’t repay its debt, which can negatively impact your credit score.

Defaults stay on your credit report for years which will almost certainly lower your credit rating, which is viewed negatively by money lenders. If you are interested in buying a house or need a line of credit opened, defaults can make this process hard, and in severe cases, impossible.

Borrowers face other penalties in addition to a black mark on their credit report if they fail to make a repayment. For instance, penalty interest may be payable on overdue debts. These can be added to any missed repayments, including anything from missed loan or credit card repayments, to mortgage payments and even Buy Now Pay Later payments. Penalty interest is interest added to the debt borrowers sometimes have to pay if they don’t pay their bills on time. This can substantially increase the amount you owe. Be sure to check the terms of your loan to see whether the lender can charge you penalty interest on unpaid debts.

Defaults can appear on your credit report for five years – even if you do pay back the money. Debts may also be referred to a debt collector if they remain unpaid. So it’s a great idea to check your credit report at ClearScore to see if you have any defaults. You can learn more about how credit scores are calculated here.

A lender won’t automatically reject an application for credit made by borrowers with a default on their credit file, but the higher the number of defaults on a credit report, the less inclined the lender will be to approve the loan due to fear of future defaulting.

Knowledge is your friend when it comes to credit card debt, defaults and clearing those black marks of your credit report. By this we mean, it is vital to know how defaults can be given, and how they can be taken away. You have rights, and these rights include the creditors doing theirs correctly. If they have not crossed the T’s and dotted the I’s in relation to your particular case, you may be able to have the defaults removed. For a creditor to lodge a default on your credit report, there must be able to prove the following:

  • The payment is overdue by at least 60 days.
  • The overdue payment equals $150 or more.
  • A notice has been sent to your last known address requesting payment.
  • A second notice was sent 30 days after the first notice.

If these defaults are legitimate and unable to be cleared, they will remain on your credit report for five years. If any of these points can be argued, you may well be within your rights to have them waived.

Every situation is different, but there are certainly circumstances which arrive in which you have a right to apply to have your default removed (and perhaps even a good chance of having that application approved).

You only missed one payment

Generally, if a default has been added after only one month, as three months in arrears (missed payments) is the standard time where defaults are added to credit reports. If you notice a default after only one missed payment, examine the details of your contract (which you should already be up-to-date on), and if this is correct in your case, contact your credit provider to remove the default.

You were not informed

Ignorance is rarely an excuse, particularly not in these cases, however there are extenuating circumstances if you have genuinely missed letters, emails or information from the creditors, either due to change of address, change of work or change of email. In this case, credit providers may show leniency and remove defaults from your credit report, provided you provide a sufficient excuse and supporting evidence. Understand that this is for certain circumstances, and will not apply to not reading the fine print properly or not checking your junk mail.

The default was added late

Timing of defaults is very important as the later they are applied, the “longer” they stay on your report. If you have missed a payment, but the default isn’t applied to your credit report for several months, you should apply to have it moved up on your credit report. The earlier it is on the report, the more time has elapsed, and, the sooner it will drop off the report.

The debt collector has added additional defaults

If your case falls into the hands of a debt collector, they may add a default to your credit report. However, if there is already a default on your credit report from your creditor in regards to the missing repayments, the debt collector is not within their rights to add another default for the same case. Make sure you check your defaults to ensure there aren’t redundant ones, as this will impact negatively on your credit score.

The debt cannot be enforced

No doubt, you have heard of a statute of limitations for crimes, well in the case of credit, old debts, while still owing, cannot receive default after a certain period of time if the creditor has not made appropriate strives to receive the money owing. This is unlikely, but Over six years old and the creditor has not made

Lack of affordability/financial hardship

Financial hardship is a very common complaint which is raised by borrowers, however in some cases they can have defaults and even debts wiped if the credit lender has not done their due diligence. Before approving a line of credit, money lenders must ensure that their customers can afford repayments, which they assess by a mathematical calculation which takes into account income and expenditure. If the repayments were too expensive for your financial situation before you even left the doors of the bank, you may have good cause to lodge a grievance against them.

No matter what your situation is, you will slo need to understand the steps involved in clearing default mistakes on your credit report.

Step 1. Check your credit score

The first and most obvious step is to check your credit rating. In addition, you want to not only look at your score (which may or may not be an enjoyable experience), but also ensure that the personal information is correct such as your name, date of birth and address, and that all the loans and debts are yours. If anything is out of place, you need to immediately remedy the misinformation, either by reaching out to the creditors or the credit report agencies, depending on the nature of the information.

Staying on top of your credit report does not have to be a scary thing, in fact, it should be something you are checking semi-regularly to ensure there are no financial surprises waiting for you in the wings. It has never been easier to check your credit report and take your first step on the path to financial security and a higher credit rating.

Step 2. Identify your black marks and defaults

Defaults are incredibly easy to spot on the credit report, to make it easier for everyone involved to spot it. The report will generally have your personal information, your credit rating and a key which will have options that will say whether certain accounts are up to date, have missed payments, are open and in default, were in default and now paid, or in default and now settled.

Once you’ve identified which accounts are in arrears and whether they are missing payments or in default, you can begin to figure out why this has happened, and whether or not you have any grounds to remove them.

Step 3. Contact the credit reporting agency to remove the defaults

If you believe you have an illegitimate default in your account, then you should contact the credit reporting agency in charge of your credit report to have these defaults removed. Defaults should not be ignored, and as soon as you realise you have a default (or even a missed payment) on your credit report, you need to contact the appropriate agencies to sort it out. If left to fester, credit report problems can cause big headaches for you in the long run.

In order to repair credit, you must contact the credit reporting agency. If this does not work and you still feel you have a legitimate claim to clearance of defaults, you can contact lawyers specialised in the field of credit defaults.

You need to know whether or not your defaults are legitimate, and whether they can be cleared or not. To do this there are several options. The first is to assess your credit report for any misinformation. It is then a wise idea to check the laws, credit rules and regulations and figure out if any of these apply to your circumstances.

Laws that apply

The law does not exist to punish, but also to protect. While missing repayments is serious, you also have rights in this area, which include the right to have inaccurate or misleading information removed from your credit report upon request (and free of charge).

The Privacy Act 1988 gives the consumer control over how their data is being handled, and allows them to know important details about your information, such as:

  • Why your personal information is being collected
  • How it will be used and who will have access to it
  • Request personal information
  • Request to have incorrect personal information corrected

The Privacy Act also gives you the options to make a complaint about how an organisation is handling your information, make a request to not be identified in your information, as well as to prevent unwanted direct marketing.

It would also behove you to get acquainted with the National Credit Code, which replaced the state-based credit codes in 2010. Before this time, credit agencies were regulated by individual state laws, but are now regulated by numerous changes in the national code which include new default notice requirements, changes regarding hardship provisions, requirements for comparisons rates schedules and the inclusion of loans for residential investments, according to the Australian Securities and Investments Commission (ASIC).

Who can put information on my credit report?

Credit report agencies are tasked with compiling credit reports. Generally they will receive information (purchases, loan terms, credit limits and owed balances) from a number of sources including creditors and lenders (banks, mainly) which they will use to build up a document which they then sell back to the creditors. The credit report is viewed as a presentation of your financial spending habits, and used as a kind of credit reputation - high, good, low, bad.

As previously mentioned, debt collectors can also receive your case and may threaten to list a default on your credit report (it is a very common tactic). It is important to know where your original outstanding balance stands with the original creditor before dealing with debt collectors.

What information can be listed?

Credit reports are extensive and thorough, and will generally include the following information:

  • Your personal information (name, D.O.B., address etc)
  • Loan amounts
  • Credit limits
  • Credit card balances
  • Payment status’ and pending repayments
  • Bankruptcies and relevant court judgements

Credit ratings are important for your financial future. If your credit rating is affected by defaults, it is in your best interest to assess your credit report and make practical decisions to ensure you aren't financially punished through a lower credit score, and the ensuing higher interest rates and worse financial deals.

The keys to improving your credit score include making repayments on time (this include mortgage, rent, and utilities), lowering your credit limit and limiting your loan applications (if possible). If defaults have affected your credit rating, remember that you are well within your rights to communicate with creditors, and file against them for any misinformation found on your credit report.

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.