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How defaults affect your credit score

How bad is it to miss a payment?


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Defaults can have a significant impact on your credit score and report. In fact, they're one of the major variables lenders look at when you apply for credit. So it’s critical to understand what a default is and how important it is to make repayments on time.

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.

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. 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.

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. This is because the lender will perceive the borrower has a higher risk of defaulting.

Take steps to manage your situation if you have debts piling up and are worried about being able to make your repayments. It might be an idea to tell the creditor you are having trouble paying your bills. It might be prepared to put in place a payment plan to repay the debt over time.

Next step: Sign up to ClearScore now to check your full credit report and score. It's free, forever.

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.

Lucy has a wealth of personal finance knowledge, and is one of our in-house experts.