Paying a defaulted account & your credit score

A reader asked if starting to pay a defaulted account will help his credit score. The simple answer is No!

But there are very good reasons why paying defaulted debts will improve your general credit situation, making it easier for you to get a loan, a mortgage or a credit card in future. That credit rating number isn’t the only thing that matters!

To start, it’s good to know what your credit history is now by checking all three credit reference agencies.

Six years is the important date

A defaulted account will drop off your credit record six years after the default date.

It doesn’t matter what happens after the default – whether you pay the account in full, start paying it, agree a partial settlement or don’t pay anything at all, the account will still be deleted after six years.

So find out what all your default dates are. If you think one is too late, read What Should the Default Date Be? which explains how to get an incorrect date changed.

Your credit record gets better after six years unless…

This may sound as though your credit score will get a lot better after six years even if you pay nothing. This is correct, but there is one big exception – your creditor may take you to court and get a County Court Judgment (CCJ).  This CCJ would then stay on your file for another six years.  Most lenders regard a default as bad but a CCJ as worse.

You may be hoping this doesn’t happen, unfortunately after five years and a few months, a debt collector may contact you and threaten court action if you don’t set up a payment arrangement. If you have moved and not told the creditor your new address, you could get a CCJ without being aware of it.

If this doesn’t happen and the defaulted account drops off, then your credit score will improve immediately. How much will depend on what else is on your credit record – if you have a lot of other debts still showing you may not notice the difference until the last ones go.

Older defaults are less bad for your credit score

Your credit record starts recovering from a default before the end of the six years. I asked Experian how their credit rating calculations changed as a default gets older. The following numbers show what happens to Experian’s credit score if there is only one default and if nothing else changes on your credit record:

• in last 2 years   – 350 points
• 2-4 years ago    – 250 points
• 4-6 years ago    – 200 points.

In practice there is almost always something else changing every month, so you shouldn’t expect to see those exact numbers but they give a feel for what is going on. For some more examples of how much different things affect your credit score, read How much will my credit score change if… ?

Your credit score doesn’t improve faster if you settle the debt, but…

Most people will expect that if they repay a defaulted debt their credit rating will suddenly improve. This doesn’t happen. So you may wonder why you should bother!

There are two very important reasons to start to repay a defaulted debt.

1. if you are making payments a lender is a lot less likely to go to court for a CCJ. A CCJ is much worse for your credit record than a default, and it would be on there for another six years.
2. lenders all make their own assessments, they don’t just use a credit score. Many lenders regard a settled default, as much less of a problem. So by repaying a defaulted debt you are more likely to get approved for a new loan.

That last point is especially important for mortgage applications. You are very unlikely to get a mortgage at a reasonable rate if you have unpaid defaults. The sooner you can repay them the better.

Each lender sets their own rules, but a current rule of thumb is that if all your defaults are over three years old and they have been repaid for more than a year, it’s worth talking to a broker about whether a mortgage is possible.

Is it worth making low payments to a defaulted account?

Low payments won’t make much of a dent in your debt, even if interest and charges are frozen. There are positive reasons in favour of token payments – once agreed with your creditors, they will reduce the hassle you get and also make it less likely that you will get a CCJ – but they aren’t going to improve your credit record or make it more likely you will get more credit.

If you expect your situation to improve, then low payments are a good option, but if this seems unlikely then you should probably look at what your alternatives are.

Conclusion

So although the answer to the reader’s question was No – repaying defaulted debts won’t improve his credit score faster, this isn’t really the full picture. A better reply is:

Your credit score will improve gradually as your defaults get older. This doesn’t speed up when you repay a defaulted debt, but some lenders are only likely to lend to you once defaults have been paid. And starting to repay debts makes a CCJ much less likely, which would make your credit record worse.

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This article was originally written in 2015. It was updated in 2017 with the details of how Experian treats defaults as they get older.