What is a default, and why does it matter so much?
A default is a record on your credit file that a creditor has reported a debt as overdue. In New Zealand, creditors can generally list a default when a debt of $125 or more is at least 30 days overdue and they’ve given you notice first. Once it’s there, it stays for five years from the date it was listed, whether you pay it or not; paying it changes its status to “paid”, but not its presence.
Banks treat defaults seriously because their credit models are built on the idea that past behaviour predicts future behaviour. One default can knock a score down sharply, and many bank policies simply exclude applicants with a recent unpaid default. That’s why owners with otherwise sound businesses can find the bank door shut over a few thousand dollars.
How do non-bank lenders read a default?
The lenders we work with read the story behind the listing. A default is information, not a verdict. What they want to know:
- How old is it? A four-year-old default followed by clean payments looks very different to one from last month.
- Is it paid? Paid defaults show the debt was dealt with.
- How big is it, and who’s it with? A $900 power bill from a disputed final account isn’t the same as a $40,000 supplier account.
- Is there a pattern? One default is a bad moment. Six defaults over two years suggests the underlying problem hasn’t been fixed.
- Does the loan fix it? If the loan clears the defaulted debts and IRD, the business comes out in a stronger position than it went in.
For property-secured lending, the equity in the property and a sensible plan for repaying the loan carry most of the weight. That’s why a default that would stop a bank application is often something our lending partners can work with.
Paid defaults vs unpaid defaults
| Paid default | Unpaid default | |
|---|---|---|
| What it shows | The debt was eventually settled | The debt is still outstanding |
| How lenders see it | A past problem that was dealt with | A live issue to resolve |
| What to do | Make sure the credit reporter shows it as paid | Pay it, arrange to pay it, or plan to clear it from loan proceeds |
| Effect on a secured loan | Usually manageable | Often cleared at settlement |
Can the loan pay out the defaulted debt?
Often, yes. With a property-secured business loan, the settlement can pay creditors directly, including the accounts that were listed as defaults, IRD arrears and other pressing debts. Clearing them means:
- The creditor stops chasing.
- Your file is updated to show the defaults as paid.
- You have one repayment to manage rather than several.
That’s a meaningfully better position than trying to juggle every creditor at once while the business is under strain.
What if you’re still in dispute with the creditor?
If you believe a default is wrong, whether the debt was already paid, isn’t yours, or was listed without proper notice, raise it in writing with the credit reporter. Under the Credit Reporting Privacy Code you’re entitled to ask for a correction, and the reporter must respond within 20 working days. Keep copies of everything. Our lending specialist will want to know about the dispute because it changes how the file should be read.
Defaults on a company vs a director
For small businesses, lenders usually look at both the company’s credit file and each director’s personal file. A default against the company from a supplier dispute, alongside clean personal files for the directors, is often straightforward to explain. Personal defaults on a director’s file carry more weight when the director is also giving a personal guarantee, which is common with business lending. Our guide on directors’ personal guarantees explains what that commitment involves.
Getting started with defaults on your file
The fastest route is honesty up front. List every default you know about, what happened and whether it’s been paid. Get your free reports from Centrix, Equifax and illion (now part of Experian) if you’re unsure. Then start an enquiry and a lending specialist will call to talk through what’s realistic.