Are you scrupulous about making loan repayments and settling accounts on time or does your personal finance history feature a string of overdue notices or the odd unpaid debt?

If you answered yes to the latter, the dawning of a new financial year may be an opportune time to mend your imprudent ways.

But how difficult is it to rehabilitate your credit record once it’s been tarnished by evidence you’re a poor payer?

Impossible in the short term, says Richard Evans*, 35, the owner of a Sydney advertising agency.

He was unable to obtain finance or get a credit card for five years in his 20s, after he failed to make repayments on a personal loan and three credit cards he maxed out on beer and skittles spending, to the tune of $11,000, in his student days.

“I’ve been working since I was 17, through uni and everything,” Evans says. “I was young, so I took out credit cards, loans … I always worked but I was irresponsible and did not pay things on time. I wasn’t scared of getting letters in the mail saying ‘you need to pay this’ – I’d just ignore them. I wasn’t aware of what the consequences of that would be in life.”

The consequences included having a series of defaults added to his credit record but Evans says he was blithely unaware at the time of the long-term repercussions.

Companies use credit reports to assess an individual’s capacity to make repayments, when any form of credit is applied for.

Default is defined as failure to fulfil a financial obligation and the term is used to refer to an overdue debt which has not been paid.

Debts of over $150 which are more than 60 days overdue may be reported to a credit reporting agency and listed as defaults on the debtor’s credit report, where they can remain for up to seven years.

“All I needed to do was pay off minimum payments or whatever and it would have been fine,” Evans says. “We’re talking a couple of hundred dollars a month. But I just wasn’t worried about it – it was weird, thinking back.

“And then when it came time to do the adult things, like actually get another car, for example, I suddenly realised, ‘hey, I can’t get it now’, because my credit rating was shot to pieces. And only then I really started becoming aware of things like [credit rating agencies].”

“I was never of the understanding when I was a kid that that’s what allowed me to get the cards and credit in the first place.”

After learning how the system worked, Evans spent a year repaying his debts, with the help of his mother. The defaults remained on his record for five years and any applications he made for personal loans and cards during this period were denied.

It was a long hard lesson and Evans says he learnt it well; becoming disciplined about living within his means and scrupulous about paying bills as they came due.

He believes his experience is a cautionary tale for other young people: “Be knowledgeable about how your credit rating works because it affects you, it affects your life, especially when you get married and have kids and stuff – you want to be able to apply for a home loan or joint credit cards with your wife, without having to get knocked back.”

Widespread ignorance

Evans’ cluelessness is not unusual. Australians can order a free credit report annually but 71 per cent of people have never checked theirs and 89 per cent don’t know their credit score, according to research last year by Veda, Australia’s largest credit reporting agency.

An individual’s credit score predicts the likelihood they will have an adverse event, such as a default on their credit card, over the next 12 months. Scores range from zero to 1200 and in 2015 the average score was 771, which falls into the Very Good category, according to Veda. Scores over 833 are considered Excellent while those below 622 suggest an adverse event is likely in the next year.

Veda’s research identified 1.9 million people as being at risk of default in 2016.

A GetCreditScore.com.au survey of 1000 Australians earlier this year found almost one in two had damaged their credit score in their 20s by missing a credit card or loan payment. More than one in three had been turned down subsequently for a credit card or loan and 10 per cent had been dunned by a debt collector.

CreationWealth senior financial planner Andrew Zbik believes many folk underestimate the long-term impact and difficulty being marked as a bad payer can create, however small the amounts involved.

“It comes to bite them and there are many instances where people are trying to get out of a difficult situation and they generally need a bit of short-term credit and that’s where it’s particularly hard to help – there’s very little we can do,” Zbik says.

A tightening of lending restrictions over the past 18 months has made it more important than ever to have a squeaky clean record.

“We’re finding a lot of people who have simply missed credit-card payments or defaulted on loan payments, been late in making those payments, banks have been refusing to give them finance,” Zbik says.

“It may have been something that happened two years ago but it’s impacting on their ability now to obtain credit.”

For most poor payers who’ve been penalised in this way, turning over a new leaf – tracking spending, then setting a budget and sticking to it – is the key to ensuring they don’t end up in the same position down the track, Zbik says.

“The harsh reality is they’re there because they’ve been tardy … I very much find it’s an issue with the people who live in the now.”

Appealing unfair outcomes

Creditors must comply with a range of regulations and procedures before they list debts as defaults. Individuals who believe their lender hasn’t done things by the book can apply to have defaults removed from their records, if the debts have been discharged.

Brisbane mortgage broker Andrew Edwards, 32, succeeded in doing so, after a car accident in 2013 saw him off work for eight months and unable to make repayments on the credit card and loan he used to cover his living expenses.

Edwards had an income protection policy but his $30,000 pay-out took eight months to come through.

“The insurance said they were going to pay and then didn’t and kept saying they were going to pay and then didn’t,” Edwards says.

“So I had a lot of broken promises to all my creditors … They couldn’t take my word and I didn’t want to keep breaking my word so I said, ‘I can’t give you dates, I just can’t do it’ … as soon as I got paid, [they] got paid out in full.”

In the interim, his debts, which totalled around $5000, had been listed as defaults. Earlier this year Edwards spent $1600 with credit repair firm MyCRA Lawyers to apply for the credit-card default to be removed, on the grounds the bank had failed to offer hardship provisions. When this succeeded, Edwards followed the same process with his other creditor.

He’s thankful to see the end of three years in credit-free limbo – “I couldn’t get credit cards, I couldn’t get a house, I couldn’t buy a new car if I wanted to … it really does affect you” – and looks forward to buying a property without having to pay an interest rate several per cent above the norm, to a non-conforming lender.

“Now I’m classed as low risk like anyone else. I can get my own house and have capital growth and wealth for the future.”

Prevention is simpler and cheaper than cure and those who find themselves in straitened circumstances should stay in constant communication with their creditors, Edwards adds. “The banks actually have a lot of rules and regulations to help consumers and it’s about asking the right questions.”

*name has been changed

Tips for a glowing report

Credit reporting agencies, including Veda, Dun and Bradstreet and Experian, offer consumers a free copy of their credit report every year. Here are some tips to keep yours healthy.

1. Check your record for defaults and pay any outstanding debts.

2. If personal data or debts are incorrectly listed, contact the credit agency and the creditor to have them amended or removed.

3. Establish direct debits to ensure your bills and loan repayments are on time.

4. Don’t make unnecessary applications for credit – too many inquiries in a short period can indicate you’re in financial distress and send your credit score south.

5. Prevent debts becoming defaults by alerting creditors early if you’re having trouble making payments.

Credit-rating chemistry

Love and money make the world go round and American underwriter Niem Green is helping singles find compatibility on both fronts. His dating site creditscoredating.com matches subscribers based on their financial wherewithal and credit compatibility. With disagreements about finance the leading cause of divorce, hooking up with someone who shares your attitude towards pinching the pennies or blowing the big bucks makes sound sense, Green believes.

“We call ourselves the love underwriters because we are the answer to this problem,” he says. “It’s the same thing I did for banks as an underwriter; I had to determine the relationship between the bank and borrowers based on credit history and financial stability. I created an algorithm to do the same for singles.”

Launched in 2006, the site has 200,000 members worldwide and has resulted in at least one marriage, according to Green.

This article by Sylvia Pennington originally appeared in The Sydney Morning Herald on the 30th June 2016. References to Andrew Zbik have been amended to mention CreationWealth.