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What is a Credit Default?
Did you know that a payment default can make it difficult for you to secure credit? It can make it difficult to obtain anything from a new mobile phone plan to getting approved for a home loan.
A payment default is basically when you are behind in your repayments on a debt. This may result in your debt being listed as a ‘default’. A consumer default is a debt of at least $150 that is more than 60 days overdue. Common examples of consumer defaults include telephone and power bills (non-financial defaults) or credit cards and personal loans (financial defaults).
A default will be listed with a credit reporting body and indicate what amount is owed and whether it has been ultimately ‘paid’ or is still ‘unpaid’.
How do I know if I have a credit default
A credit provider will reach out to you multiple times before listing your overdue payment as a default. Usually, the first notice is an overdue payment notice, which is ultimately a request for you to promptly pay the overdue debt.
The second notice (sent a minimum of 30 days after the first), warns you that a notice for payment of the full amount will be sent if the overdue debt is not paid.
After a minimum of 14 days from sending the second notice, the credit provider can inform a credit reporting body and the default will be listed on your report. There is no requirement to notify you that your debt is now listed as a default. We see many people with defaults that they weren’t aware of.
How does a credit default impact me?
Prior to advancing credit, a credit provider will review your credit file. Credit files with default listings will be viewed less favourably by many credit providers. This is because it demonstrates a higher level of risk since you failed to pay off debt in the past.
A default will remain on your credit file for 5 years.
Can I have the credit default removed?
Even if you pay the outstanding amount, the amount on your credit file can’t be changed to reflect any payments you have made since the default was issued. However, the listing on your file will be changed to ‘paid’.
- Listed in error
- Something outside your control such as a natural disaster or a bank processing error for a direct debit
- The debt wasn’t yours (in the case of mistaken identity or fraud)
- You didn’t receive the appropriate written warnings (due to creditor error or change of address)
- You requested financial hardship, and the default was listed before 14 days had passed after they advised you of the outcome
- The debt is ‘statute barred’, which is 6 years for most debts (and possibly longer for a home loan). This means you haven’t made any payments towards the debt in this timeframe
You can request a listing be corrected free of charge if you believe that a mistake has been made. This may occur due to inaccurate, out-of-date, incomplete, irrelevant, or misleading information. You should:
- Raise your concern with the credit provider or credit reporting body. If they don’t help raise it with their external dispute resolution service
- After investigating your complaint with your provider, the credit body can remove the listing.
- If the credit body decides not to correct the information, they must tell you the reasons why the correction hasn’t been made.
- If you are unhappy with the response of the credit provider or the credit body, you can make a complaint to the Australian Financial Complaints Authority. Get legal advice before making a complaint.
Can I pay to have my credit report fixed?
There are many ‘credit repair’ or ‘debt solution’ companies that claim to be able to ‘fix’ your credit report for you for a fee. Generally, these services come at a high cost and can be unnecessary. They may try and get you to consolidate debts with a high interest loan or enter insolvency arrangements, which could end up costing you more money.
If you need to change or correct any information on your credit report, you can do this for free as outlined above.
Often a financial counselling service or a community legal centre in your area may be able to assist. It is important to ensure that it is a community-based organisation or charity and not a commercial organisation. A good starting point for referrals would be the relevant Legal Aid organisation in your state.
Can I still get a home loan or refinance with a credit default?
There are lenders that take a common-sense approach to past credit impairment. In fact, some of the mainstream banks will have policies that allow for some minor credit impairment. Generally, these will be limited to non-financial defaults and will need to be paid out and smaller in size (maybe up to $1,000).
If you have a larger amount that is paid or unpaid, there are non-conforming lenders that will look at your story rather than just the credit file. They have product lines that cater for different types of impairment.
The rates will be slightly higher that prime rates, but this is due to a slightly higher perceived risk. But the good news is that after a qualifying period, these lenders will often move you towards a rate that reflects a prime customer.
A payment default on your credit file can spell bad news for future credit applications. So, if your credit provider reaches out to you, it is best to sort out any issues before they list a default. Depending on the type of debt, you may be eligible for debt negotiation.
Errors can be corrected without needing to pay specialist companies. But if you do have a default there are still lenders that will take a common-sense approach in deciding whether to offer you finance.
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