A reader, Mr W, asked:
I had credit cards and got myself in a mess when getting balance transfers but keeping the old cards. Then I lost my job two years ago, but I am now working again. I have defaults ranging from 2021 to last month ago. All my debts add up to about £6,500.
One has offered me a discount if I clear the outstanding balance. Is a 20% discount on a £3,500 debt a good deal? I might be able to borrow the money from a family member to pay them.
Will I be better off paying in full or accepting a discount? I would like to finance a car next year for £10,000.
Contents
Some facts about credit scores and partial settlements
Some general points first, then I’ll look at how they can affect Mr W’s decision about what to do.
Some of these may surprise you, so I have included links if you want a more detailed explanation.
- you are very unlikely to be offered a low settlement on a recent default. See “Is it too soon for low settlement offers to be accepted?”
- paying off defaults doesn’t improve your credit score . But some lenders are more likely to lend to you as they can see you now owe less money.
- settling a debt partially, not repaying full, adds a marker to the credit record for that debt. Other lenders can see this when you apply for more credit, but it doesn’t affect your credit score, that will be the same whether you settle the debt in full or partially… or not at all!
- any debt that has defaulted will drop off your credit record 6 years after the default date. This doesn’t change if you settle the debt in full or partially.
- some lenders may care about debts settled partially, others don’t mind just so long as the debt has been repaid.
So, will partial or full settlements help Mr W get car finance?
With several very recent defaults on his credit record, Mr W has no chance of car finance at a half-reasonable rate in the near future. This isn’t likely to change if the debts are settled, whether that is in full or partially.
Look at it from the car finance lenders’ point of view… Mr W got into major problems before and he now wants to borrow a lot more money. Only bad credit lenders would be likely to consider him, and that is likely to be at a very high APR.
If he waits a while – a year or more – after settling all the defaults and doesn’t have any more credit record problems during this time, then he may be able to get finance at an OK rate, but it probably still won’t be cheap.
Don’t borrow money to take a 20% off settlement offer
Mr W has been offered 20% off a £3500 debt by a debt collector. This would clear half his debt and it could be a good idea if he had the money in the bank. As none of the defaults are old, he probably won’t get a much lower offer.
But borrowing money to take this offer is a big mistake.
The interest on his defaulted debt is already frozen. If he borrowed the money commercially, paying interest, he wouldn’t gain anything at all from this. His credit score won’t improve and he now paying interest which could go wrong in the future.
Sometimes people want a consolidation loan to clear current and defaulted debt. This is normally at a high rate of interest and can be unaffordable in practice, even though it can sound like a neat solution in theory. Never consolidate debt except at a low interest rate, and never consolidate debt where you aren’t paying interest!
The problems with family loans
Mr W is hoping to borrow the money from family so he probably wouldn’t be charged interest. But often family loans come with emotional pressure.
If Mr W was to lose his current job, he could drop his payments to the debt collector to a token £1 a month. But when he has borrowed from family, that could leave them in difficulty. Or the family member could have financial problems themselves and need the money back.
Of course all this would be different if he was being offered 80% off not 20% off. That would be an offer worth stretching to take. Mr W could feel more confident he could quickly repay the much lower amount to a family member.
A better way forward
If Mr W has a relative that can lend him £3-4k and he has to have a new car, he has a much better option. Use the family loan to buy a cheaper car outright, no finance at all.
Then Mr W can use the £250+ a month the car finance would have cost – which he thinks he can afford – to repay his relative and set up payment plans for the defaulted debts.
This is a much lower cost and lower risk strategy. If his income drops, he can reduce the payments to the defaulted debts and not have the car repossessed.
Get a refund of car finance commission
Car finance affordability complaints
Debts keeping you awake at night?
Jay says
Better to clear all your debt by paying a decent amount each month from your salary. Borrowing, be from a relative or car finance really isn’t sensible in your circumstances. Depending on your salary and outgoings, 6.5k realistically could take a quite a few years to clear.
Lisa says
I just had an interesting call from Link Financial. I have an outstanding balance with them for £268 which they defaulted in 2017. The debt is not enforceable so I have made any payments towards it since finding this out. They continue to phone me, which I understand, as I have an outstanding balance, however, I have just been told by the caller that if the debt is settled then it will improve my credit score as it will be marked as settled!
Sara (Debt Camel) says
It won’t improve the headline credit score you see on reports. But it may make some lenders prepared to offer you more credit. It’s up to you if you think it’s worth paying anything for this.
Was 2017 the actual date you defaulted on the debt?
Lisa says
Yes I had been making payments consistently but then missed 3 payments to Link Financial and they defaulted me straight away. It was for an old credit card I had which i got behind on the payments for. The credit card goes back 10 years so i have no information on it. After finding your site i asked for a copy of the original agreement which they couldnt provide so I stopped making payments as they had defaulted it already. I guess the original card should have been defaulted when the debt was sold to Link but I dont have any paperwork going back that far.
Mikky says
Feb last year I entered what I believed was a short-term agreement with Vanquis paying £10 per month due to financial difficulties. In April I realized that I was put on a long-term payment plan & I would pay £10 per month until my account was closed. I questioned this as something did not agree to but they say they sent me the T&Cs in Feb. Is sending the TCs the same as agreeing? If I’d known by entering into agreement would’ve had an adverse effect on my credit file I would’ve found the money somehow to keep up the monthly payments as I’m trying to buy a house. I shouldn’t have left it so long to follow up, but with Covid & lockdown I was distracted. It wasn’t until last month when I checked my file I had AR markers stretching for an entire year (I had previously been using credit karma which didn’t show these). My outstanding balance is approx £3250 so at the current rate of £10pm, it will take 27 years to clear, 27 years of AR markers. Did Vanquis have a duty of care to advise me of the negative long term effect entering into this payment plan would have? I’ve since learnt that AR markers appear on your credit file for a further 6 years after you have repaid the debt & the ICO states that an ‘arrangement to pay ’involves a temporary, short-term (up to 6 months) arrangement where the lender agrees to accept reduced payments.
Mikky says
Do I have a case to have the AR markers removed and my regular payments reinstated? I know I can argue that actually a default will be better, but if I get a default added instead it will immediately effect my credit score and I cannot afford for it to drop before I have my mortgage approved. Once the mortgage is approved, if I have to take the default over the ARs then I am happy to. If I were to get a default placed instead, it would be Dec 19 at the very earliest.
What is my best course of action?
Sara (Debt Camel) says
Well you can ask to have the markers removed because you were not informed about them. But it may come down to what was said in the phone call.
Presumably £10 a month was all you can afford back last Feb? The minimum payment on that sort of balance would have been over £100. And Vanquis also froze interest at that point?
How would this have changed if you had known more about the credit record implications?
Dave says
I have 2 defaults both dated 2020, but I still owe money on these debts. If I pay off these debts by say march 2024. Will that then stay on my credit file until 2030
Sara (Debt Camel) says
Any debt with a default date will drop off your credit record 6 years after that date. Whether you have paid it in full, settled them partially or are still making monthly payments.
So your debts will drop off in 2026. Not 2030.
I suggest you consider making settlement offers to these – it could save you some money. See https://debtcamel.co.uk/debt-options/less-common/full-final/
Dave says
What happens if I have debt remaining when the default drops off. Will it still show the debt amount on my credit file
Sara (Debt Camel) says
No, it vanishes. But read https://debtcamel.co.uk/debt-not-on-my-credit-file/