Default

Default is a formal record of unpaid debt that appears on your credit file when you fail to make repayments for 60+ days and the creditor reports it to credit bureaus. It remains visible for 5 years and significantly damages your credit score and borrowing capacity.

What Triggers a Default

Timeframe Requirements

A default can only be listed if:

• The debt is at least $150 (minimum threshold)
• You're 60+ days overdue on payments
• The creditor has sent you a written notice giving you 30 days to pay
• You haven't paid within that 30-day period

Example timeline:

• Day 1: You miss a $500 credit card payment
• Day 60: Creditor sends default notice
• Day 90: If still unpaid, default is listed on your credit file
• Years 1-5: Default visible to all lenders

Common Types of Defaults

Credit cards:

• Minimum payment: $300/month
• Missed 3 months = $900 owed
• Default listed at 90 days overdue

Personal loans:

• Monthly payment: $800
• Missed 2 months = $1,600 owed
• Default can be listed after 60 days + 30-day notice period

Utilities (gas, electricity, phone):

• Bill: $400
• 60 days overdue + 30-day notice = default possible

Buy Now Pay Later (Afterpay, Zip):

• While not traditionally reported, serious defaults can now appear on credit files

Impact on Your Credit Score

Score Drop

A default typically reduces your credit score by 200-350 points.

Example:

• Before default: 750/1,200 (good score)
• After default: 500/1,200 (poor score)
• Time to recover: 2-5 years

Multiple Defaults

Each additional default compounds the damage.

Example scenario:

• 1 default: Score drops from 750 to 500
• 2 defaults: Score drops to 400
• 3+ defaults: Score drops below 300 (severe impairment)

Impact on Loan Applications

Home Loans

With 1 default under $1,000:

• Major banks: Usually decline
• Non-bank lenders: May approve with 10-20% deposit
• Interest rate: 6.5-8.5% p.a. (vs 5.8-6.2% p.a. for clean credit)

Example:

• Borrower: $180K household income, $600 default from 2 years ago
• Major bank result: Declined
• Non-bank lender: Approved at 7.2% p.a. with 15% deposit
• On a $500,000 loan: Pay ~$5,000/year extra in interest

With multiple defaults or defaults over $5,000:

• Mainstream lenders: Automatic decline
• Specialist lenders: Possible with 20-30% deposit
• Interest rate: 8-12% p.a.
• May require default to be paid off first

Car Loans

Small default ($150-$500):

• Bank/prime lender: Usually decline
• Near-prime lender: Approved with higher rate
• Rate increase: +1.5-3% p.a.

Example:

• Clean credit rate: 6.99% p.a.
• With default rate: 9.99% p.a.
• On a $40,000 car loan: Pay ~$3,000 extra over 5 years

Large defaults ($5,000+):

• Require 20-30% deposit
• Rates: 12-18% p.a.
• May need to pay off default first

Personal Loans and Credit Cards

Defaults make approval extremely difficult:

• Credit cards: Usually automatic decline
• Personal loans: Specialist lenders only, 15-25% p.a. rates
• Buy Now Pay Later: May still be accessible (less strict)

How to Remove a Default

1. Pay the Default and Request Removal

Process:

1. Contact the creditor and pay the debt in full
2. Request a "paid default" status update
3. Ask if they'll remove it entirely (some will for goodwill)

Example:

• Default: $2,500 credit card debt from 2023
• You pay it off in 2025
• Credit file shows: "Default - Paid" (better than unpaid, but still visible)
• Some creditors will remove it if you negotiate

2. Dispute Incorrect Defaults

If the default is wrong (not yours, incorrect amount, already paid), you can dispute it.

Process:

1. Contact the credit bureau (Equifax, Experian, Illion)
2. Provide evidence (bank statements, payment receipts)
3. Bureau investigates within 30 days
4. If proven incorrect, default is removed

Example:

• Default listed: $800 telco bill
• You have proof of payment from 2023
• Submit dispute with bank statement
• Default removed within 4 weeks

3. Wait 5 Years

Defaults automatically fall off your credit file after 5 years from the date of default (not the date of payment).

Example:

• Default listed: March 2024
• Falls off: March 2029
• Even if paid in 2025, still visible until 2029

Living with a Default

Strategies to Still Get a Loan

1. Use a mortgage broker NIK Finance brokers know which lenders accept defaults and can structure your application to maximize approval odds.

2. Provide a larger deposit

• With default: 15-20% deposit (vs 5-10% with clean credit)
• Lower LVR = less risk = easier approval

Example:

• $600,000 property
• Clean credit: Can borrow 95% ($570K) with 5% deposit
• With default: Need 20% deposit ($120K) to borrow 80% ($480K)

3. Wait for the default to age The older the default, the less impact.

Impact by age:

• 0-12 months old: Severe impact, most lenders decline
• 1-2 years old: Moderate impact, specialist lenders only
• 2-3 years old: Reducing impact, some non-bank lenders approve
• 3-5 years old: Minimal impact if paid and only one default
• 5+ years old: Falls off credit file entirely

4. Increase your income or add a co-borrower Higher income or a co-borrower with clean credit can offset default risk.

Example:

• Single applicant, $100K income, 1 default: Declined
• Same applicant + partner ($80K income, clean credit): Approved

5. Pay Off the Default

A "paid default" looks better than an unpaid one.

Example:

• Unpaid default: Most lenders auto-decline
• Paid default (over 1 year old): Some non-bank lenders approve

Preventing Defaults

Set Up Payment Plans

If you can't pay, contact the creditor before you're 60 days late.

Example:

• You owe $3,000 on a credit card
• Can only pay $200/month
• Call the bank, arrange a hardship payment plan
• Default avoided

Financial Hardship Provisions

Australian law requires creditors to consider hardship applications.

You can request:

• Reduced payments
• Interest freeze
• Extended repayment terms
• Debt waiver (in severe cases)

Example:

• Job loss, can't pay $800/month personal loan
• Contact lender, prove hardship (Centrelink statement)
• Approved for $300/month for 6 months
• Default avoided, credit score protected

Monitor Your Credit File

Check your credit file every 6-12 months (free via Equifax, Experian, Illion).

Catch issues early:

• Unpaid bills you forgot about
• Debts in collections
• Errors or fraud

Final Thoughts

A default is serious but not permanent:

• Lasts 5 years on your credit file
• Significantly impacts loan approval and rates
• Can be managed with the right strategy

If you have a default:

• Pay it off if possible (shows responsibility)
• Wait 1-2 years before applying for major loans
• Use a NIK Finance broker who knows lenders that accept defaults
• Provide a larger deposit to offset risk
• Build positive credit history (pay everything on time)

Most importantly: Don't ignore debt problems. Contact creditors early to arrange payment plans and avoid defaults in the first place.