Paid vs Unpaid Defaults: Why the Difference Matters

Why “Paid” vs “Unpaid” Changes Everything

Two borrowers, identical $800 defaults. One paid it last year; one never got around to it. At several lenders, the first is approvable and the second is an automatic decline — same debt, same size, completely different outcome.

A default doesn’t come off your file when you pay it — it stays for five years either way. What changes is the label: lenders read a paid default as a problem you fixed, and an unpaid one as a problem you’re still in. That single word moves you between pricing tiers, and sometimes between a yes and a no.

What Legally Counts as a Default

Not every missed bill becomes a default. To list one, a credit provider needs:

• a debt of $150 or more,
• 60+ days overdue, and
• to have followed the notice requirements — written warnings to your last known address before listing.

Those notice requirements are a defined sequence, not a single letter. Before a default can appear on your file, the credit provider has to send a first notice telling you the payment is overdue, then a second notice at least 30 days later warning that it intends to report the debt to a credit reporting body. After that second notice it must wait a set window, at least 14 days but no more than three months, before the listing can actually go on. Miss any step, or send the notices to an old address, and the listing itself may be disputable.

Miss any of those and the listing is disputable. Smaller slip-ups show up instead in your repayment history (RHI) — the month-by-month grid of green ticks and numbers that sits on your file for 2 years. RHI isn’t a default, but banks’ automated rules read it just as unforgivingly:

The Severity Ladder (July 2026 Policy)

A Closer Look: Defaults by Lender Tier

The ladder above is the shape of it. Here is the granular version, tier by tier, so you can see where a specific default size, age and status actually lands on our specialist panel. Every file is still assessed individually, so treat this as a guide, not a quote.

Pepper Money

• Prime: accepts small paid defaults up to $500. This is Pepper’s cleanest tier and behaves closest to a mainstream bank policy.
• Near Prime Clear: accepts paid or unpaid defaults up to $1,000 each.
• Near Prime: a step deeper, accepting unlimited paid or unpaid defaults up to $3,000 each, plus larger defaults over $3,000 once they were listed more than 24 months ago.
• Specialist: accepts larger defaults over $3,000 once listed more than 12 months ago, on top of the smaller bands.
• Specialist PLUS: adds more tolerance again, including a single credit event listed less than 12 months ago.

Resimac

Resimac doesn’t count listings one by one. Its Clear and Plus tiers group listings that trace back to one cause within a six-month window into a single credit event, and accept defaults under $2,000 generally up to 80% LVR. That grouping is often the difference between one manageable event and a file that reads like a list of separate strikes.

La Trobe Financial

La Trobe assesses across credit grades, from its cleanest grade through to its most flexible. As the grades move outward, tolerance for larger, more recent or more numerous defaults increases, while the maximum LVR reduces accordingly and is confirmed at application rather than fixed by a single published table.

Policy figures current at July 2026 and general information only. They change without notice and are not a quote or a guarantee of approval.

The “One Credit Event” Concept

A divorce, an illness or a business failure rarely produces one tidy default — it produces five, all listed within a few months of each other. Several specialist lenders recognise this and assess all listings from a single life event as one credit event rather than five separate strikes. Presented properly, “a bad six months, finished, with clean conduct since” lands you tiers better than the same file presented as a list of five defaults. This is exactly the kind of framing a well-evidenced explanation letter does.

Paying a Default Out at Settlement

You don’t always need to find the cash to clear an unpaid default before you apply. In many cases, especially on a refinance, the default can be paid directly out of the new loan’s settlement funds. Mechanically it runs in four steps:

1. Identify and verify the debt. You get a current payout figure from the original creditor, or from whichever debt collector now holds the account, confirming the exact amount needed to close it out.
2. The lender builds it into the loan. The new loan amount is set to cover your existing mortgage or purchase price plus the default payout figure, structured the same way as any other debt consolidation.
3. Funds are disbursed directly. Rather than the money passing through your account, the settlement agent pays the creditor or collection agency directly from the loan proceeds at settlement. That gives the lender certainty the debt is actually cleared as a condition of the loan, not just promised.
4. The record is updated, not deleted. Once paid, the creditor updates the listing to show payment. It stays on file for the balance of the five-year period, but from then on it’s assessed as a paid, resolved default rather than an open one.

This is particularly common where an unpaid default is the specific condition standing between an applicant and approval. Clearing it at settlement solves the problem inside the same transaction, rather than requiring it to be resolved separately beforehand.

Disputing a Default You Think Is Wrong

Not every default on your file is accurate. A wrong amount, wrong dates, a debt that was already paid before it was listed, or one that never reached the 60-day and $150 threshold in the first place, are all valid grounds to dispute.

Under current guidance you don’t need to track down the original creditor to have an error corrected. You can raise the correction request with any credit reporting body or credit provider that holds your information, and that entity is required to deal with the request directly rather than sending you elsewhere. Where the correction touches information held by another party, the entity you approached must consult that other body on your behalf. This is the “no wrong door” approach, and it exists so that consumers aren’t bounced between organisations while an error sits on their file. Corrections generally have to be actioned within statutory timeframes and you’re entitled to be notified of the outcome.

Sometimes a default is correct but there’s genuine context behind it: illness, a relationship breakdown, a temporary job loss. In that case the right tool isn’t a dispute, it’s a clear letter of explanation attached to your application. We’ve published a real template and worked example at our Explanation Letter Example page. A well-written letter, alongside evidence the default has been paid where possible, is often what moves a specialist application from a decline to an approval.

Your Playbook

1. Pull all three bureau files (Equifax, Experian, Illion — free) and list every default: amount, listing date, paid status.
2. Dispute anything incorrect. Wrong amounts, missing notices, debts that aren’t yours — disputes are free, and there’s no wrong door: the credit provider, the bureau, then AFCA/OAIC.
3. Pay what’s small and real. Paid beats unpaid at every tier — and some lenders can pay larger defaults out from the loan at settlement.
4. Stop creating enquiries while you fix the file — every application leaves a mark.
5. Match the lender to the file — the ladder above is why one decline means nothing and five declines are self-inflicted. Also check hardship flags — they hide next to clean-looking RHI and trip different rules again.

The Lenders We Use With Defaults on File

Different lenders draw the line on default size, age and status in different places, which is the whole reason lender-matching matters. Each review explains how that lender assesses defaults:

• Pepper Money review: tiered from small paid defaults up to unlimited defaults on its deeper tiers.
• Resimac review: counts credit events rather than individual listings, and accepts defaults under $2,000 to 80% LVR on Clear and Plus.
• Bluestone review: its Near Prime tier is positioned for small or older defaults.
• La Trobe Financial review: grades across a spread of credit histories, with tolerance widening as the LVR reduces.
• Liberty review: a flexible non-bank option for a mixed or larger set of listings.