What do telcos & banks have in common?
Everybody knows that they need to pay their bills on time but did you know that not paying your bills (especially to telecommunications companies, energy companies and of course banks and other lenders) in a timely manner could affect your ability to get a mortgage or even a personal loan?
If you neglect to pay a bill over a certain amount and for a certain length of time, then it can be listed on your record as a ‘credit default’. Credit defaults are bad news because they stay on your file for up to 7 years and decrease your credit score, and lenders use this score to determine whether or not you’re a good prospect for a loan.
We’ll take a closer look at some of the terms mentioned here and explain exactly what constitutes a credit default and why it should be avoided.
What is a credit score?
Credit reporting agencies are responsible for assessing records and scoring individuals, usually with a number from 0 to 1200. The higher the score, the better.
Anyone who pays a bill, borrows funds or uses a credit card can be assessed and given a credit score, and lenders use this score to determine someone’s suitability for a loan. Any credit defaults to Telcos, energy companies or banks, will show up on your credit report.
If you pay back the money you owe on or before the due date you’re not likely to have any credit defaults on your report. But it doesn’t mean you’re exempt from your credit score being affected.
Your credit score can decrease if you have a number of credit cards with a high limit, and you’ve previously applied for a number of personal loans. A higher credit limit or too much unsecured debt can also make you a risky prospect and decrease your chances of mortgage approval.
The new credit reporting system (which we will discuss in a future post, watch this space!) allows lenders not only to see what credit you’ve applied for in the past but also what is the current credit limit on all your accounts.
What is a credit default?
A credit default is another name for an unpaid debt. A credit default can show up on your report and can remain there for five years from the date it’s listed, and decrease your credit score. But the debt has to be over $150 and more than 60 days overdue to be listed by a creditor.
During that time the creditor must send two written notices, one to state the amount overdue and the second to state that, if not paid, it will be reported to a credit reporting body, i.e Equifax. If you’ve moved house and haven’t made arrangements to forward your mail, you may not be aware that you owe money on a final phone bill or utility bill.
Unfortunately, the consequences of this can mean a credit default showing on your record further down the track when you’re applying for a loan. It always pays to inform any companies you have dealings with of your new address for this reason.
Can a credit default get worse?
Yes, a credit default can turn into a serious credit infringement if the debt isn’t paid and the creditor can’t reach a payment plan agreement with you. This has a greater impact on your credit score than a credit default as it gives the appearance that you’re avoiding the creditor.
Once a credit infringement is paid, it reverts to a credit default.
It is worth noting that even if you pay the default or infringement it will remain part of your credit history for 5 or 7 years and cannot be deleted, except in very special cases (such as the reporting body not following the right procedures when submitting the default)
How do I avoid a serious credit infringement or default?
To avoid any negative credit on your record, it’s important to pay all your bills and debts, in full, on or before the due date. If you find yourself unable to pay a bill or forget to do so, discuss the issue with the creditor before they start proceedings. Creditors have a “financial hardship” plans in places and would much rather reach an agreement for a payment plan than issue the credit default.
In addition, putting your head in the sand isn’t going to make the debt go away and it can get larger if the creditor starts adding interest or late fees, which incidentally also show up on your credit report.
Need help with getting your finances in order to apply for a mortgage? We’re always happy to have a chat so contact us to discuss your situation or to find out about the various financial products available.