A reader asked if starting to pay a defaulted account will help his credit score. This is a complicated area, as it depends when and how much you pay, so let’s look at some of the different situations.
With all of these, if you want to know what is going to happen to your credit record, you need to know exactly what it says now by checking all three credit reference agencies. For the rest of this article I am assuming that you do have a default on your credit file, not just one or two missed payments which will have less of an impact on your credit score.
Six years is the important date
A defaulted account will drop off your credit record six years after the default date. The default date is therefore an important piece of information – if you think it is wrong, read What Should the Default Date Be? which explains how to get an incorrect date changed.
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 what happens if you don’t pay anything?
This may sound as though your credit score will get a lot better after six years even if you pay nothing. This is correct unless your creditor takes you to court and gets a County Court Judgment (CCJ). A CCJ is shown in a separate part of your credit record and this will then stay on your file for another six years. Most future lenders regard a default as bad but a CCJ as worse.
Unfortunately, it is likely that after 5 years and a few months, just when you were hoping things were going to get better soon, a debt collector will contact you and threaten court action if you don’t set up a payment arrangement. Or if you have moved and not informed the creditor of your new address, you may find that a CCJ has been granted without you be aware of it.
If this doesn’t happen and the defaulted account drops off, then your credit score will improve and it is also likely that the debt will have become statute barred. Find out more about this here: Statute Barred Debt – Common Questions.
If you resume payments soon after the default
This could typically happen if your household income dropped – perhaps because of illness, redundancy or reduced hours – but then recovered so you go back to making what would have been the “normal” payments. The balance outstanding on the account will be falling each month and your credit rating is likely to slowly improve as the default becomes further in the past and you owe less. For a few years you will probably find it hard to get a mortgage / remortgage but this will gradually improve.
The sooner you can repay the debt in full the quicker your credit score will recover. It may not get to ‘perfect’ until the defaulted account has dropped off after 6 years, but it will improve a lot.
If you resume payments a few years later
Much the same happens if you resume a high level of payments after a longer period – except now your credit score probably won’t recover a lot before the six years is up. Doing this however has the major advantage that it makes it very unlikely that you will get a CCJ, so although the six years of credit record pain won’t be shortened much, at least they can’t be extended by another six years with a CCJ.
One alternative here that you might consider if you can get a lump sum (possibly from making a PPI claim? If you haven’t done this already, it’s now easy to do and well worth a try!) is making a full and final settlement offer.
Making low or token payments to a defaulted account
Low payments aren’t going to 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 they are agreed with your creditors, they will probably reduce the hassle you get considerably and they will make it less likely that you will get a CCJ – but they aren’t going to make much of a difference to your credit record. And of course making token payments means that your debt will never become statute barred.
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, see When should I offer a Token Payment?
So will paying a defaulted account help your credit rating? If you are paying significant amounts, then your credit score is likely to slowly improve. Most importantly, repaying an account will make it much less likely that you will get a CCJ, which would make your credit record worse.