Has the bank asked you for an explanation letter? This is common if you’ve found yourself applying for a home loan with credit issues, or maybe you’ve moved address or accidentally forgot to pay for a phone bill. Either way, there are a few ways to work this out. You’ll need to be prepared with evidence and a good explanation.
In general, banks look for a letter to explain the circumstance for those who have missed payments on current debt, bankruptcy, defaults, or judgements against their credit file.
So to get you moving with this process, we’ve compiled some letters as templates for you to use when explaining your reason for defaulting and how you rectified it.
Table of Contents
Template for an explanation letter
Australian lenders have strict requirements for letters explaining any credit problems you may have.
Use the outline below to help make the process as smooth as possible.
Your letter should be:
- Contain your full name and address.
- Explain what happened in as much detail as possible.
- Provide any evidence that supports why you defaulted on the credit facility, including receipts, letters, insurance policies and contracts (only send copies so you can hold onto the originals).
- Include a sentence confirming that you understand how serious the credit problem is and intend never to get into that situation again.
Usually, an email or faxed copy is accepted. However, some will require your mortgage broker to have a copy of the original file.
Default explanation letter to the bank
To Whom It May Concern:
Re: Default to XXX for $500
I can confirm that in May 2021, I purchased a mobile phone through Telstra. One week later, the phone malfunctioned, and I returned it to the store. I asked for the plan to be cancelled. However, the staff did not cancel the plan, and the bills continue to be sent to me for a phone that was not in use. This case was escalated, and Telstra lodged a default on my credit file.
I am currently pursuing this further with the Telecommunications Ombudsman. Evidence has been included for your reference. I am aware of the serious nature of a credit agreement and will ensure every effort is made to make payments on time for my home loan. Please do not hesitate to contact me on XXXX if you require further information.
Chat with Hunter Galloway for further support about writing a letter to the bank.
To make a successful application, you need to adhere to the bank’s guidelines for the letters; otherwise, the bank could decline your loan.
Explanation letter for business issues
It’s not uncommon to have issues with your business, and the bank might pick this up as a part of the application process. It could even be as simple as explaining that a current directorship you have is for a hobby business or something that is a side business and that you aren’t reliant on that income.
My wife and I had a small business that was part of a larger franchise group. In 2020 the large franchise group went into liquidation, and as a result, we were forced out of business.
Due to the cost of setting up the business, we were left with numerous debts. However, we have now returned to our previous jobs and repaid the debts. This experience, unfortunately, has left defaults on our credit file.
Sharehouse bills explanation letter
Shared houses can be great. They allow you to split bills and expenses with everyone living there, but the downside is that you might leave someone responsible for a bill, and they forget to pay it. This means you get hit with an electricity provider default and could cause headaches when applying for a home loan.
In 2021 I was living in a share house with two other flatmates. The lease and utilities were under all of our names. Later that year, I moved out of the property, but I was unaware that I was still liable for the utility bills.
I tried to apply for a credit card and was knocked back due to a default on my credit file. Only then did I find out that my previous housemate had not paid the electricity bill.
Unemployment explanation letter
An unemployment explanation letter is less common than the others but could be used to explain to the bank a gap in your employment history and the reason for it. This is quite a common reason loans get declined by various banks.
I was living in a country town that heavily relied on the mining industry.
The local mine closed, which had disastrous effects on the entire town’s economy and caused me to lose my job.
I could not find work in the town for over 6 months, and despite my best efforts, a default was lodged on my credit file.
I have since moved to a major city, have stable employment and have paid my outstanding bills.
Divorce explanation letter
Again this is a less common explanation letter but could be required to explain why home loan or electricity bill repayments were missed even though you were still fully employed.
My wife and I divorced in early 2016, leaving me with the children. I moved back in with my parents until I could find somewhere for us to live. During this time, all of our bills were being sent to our previous address, and my ex-wife did not pay them.
Moved overseas explanation letter
Moving overseas is a common reason why people default on telephone and electricity bills, as they might forget to set up mail forwarding and never know they even owe the money!
Fortunately, you can use the letter template below to explain your situation and how the problem occurred.
In 2019 I moved to Europe for three years.
Prior to leaving, I instructed my credit card provider to mail my statements to my parents’ address. However, for some reason, the provider never changed my address, and they couldn’t contact me, so a “clear out” default was lodged on my file.
Upon my return home, I found out about the unpaid bill and got in contact with them to pay it immediately.
Moving house explanation letter
This is another unfortunate situation where you might have moved house, forgotten to get your mail forwarded and, consequently, fallen into default with your provider. Not to worry, fill out this letter, and we can look at your home loan options.
Due to renting, I moved house in 2016 and informed my internet and phone bill providers of this. For some reason, the transfer was not completed, and they continued sending bills to my previous address. After some time of the account being unpaid, they lodged a default on my credit file without notifying me.
Hunter Galloway’s tips for explanation letters
It’s important to follow the bank’s requirements closely, but alongside this, here are a few tips to help get your message across:
- If you were guilty: Take responsibility. Don’t blame anyone else or the creditor for your mistakes, as this can really reflect badly on your character.
- If you were innocent: If it was a mistake, describe what steps you took to rectify the situation, including all correspondence with relevant parties, in a clear and concise manner.
- Explain what steps you’ll take: Be clear that you don’t intend to get into a similar situation again and also how you plan to do that. It can work in favour of your application.
Good and bad reasons
Lenders will try and understand whether or not the problem was your fault. However, if it was your fault, don’t expect the lenders to be on your side and support you unless you can give them a strong reason as to why you’re not a high-risk customer.
Good reasons for default include illness, marriage breakdown, being overseas or a dispute with your utility provider.
Bad reasons for default include an unwillingness to pay, loss of job, bad money management and spite.
Evidence is everything
Without evidence to back up your story, you’ll find it very hard to win the lenders over. For divorcees – can you provide a letter from your solicitor? Or if you were travelling, have you got a copy of your visa? All of this evidence will help form your case and make it clear to the lender how you’re currently trying to resolve the situation.
Speak to Hunter Galloway about writing your credit history letter and home loan options today.
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