Ms F asked:
“I have been in debt management for five years after my marriage breakdown. After an inheritance, I want to pay off my DMP as it will carry on for years. I could pay in full but my house needs some urgent work and my car is on its last legs.
I asked about my credit score if I offer a partial settlement and was told this would show as partially settled on credit score file. Will I still be classed as a risk for years to come? For my credit rating would it be best to pay in full?
I want to move house in a couple of years and am wondering if a partial settlement will stop me.”
It sounds like a simple question, but the answer isn’t straightforward as debts in a Debt Management Plan (DMP) can be marked in different ways on your credit records.
So you need to check your credit records with all three credit reference agencies and see how each debt has been marked.
What should have happened in this case?
Debts should be marked as defaulted when you are between three and six months in arrears.
Ms F’s DMP has a long way to go. So her monthly payments are probably quite low. And her debts should probably have been defaulted in the first year of your DMP.
Does this apply to you?
In that case, if you settle the debts partially now, they will all drop off six years after the default. After that, a mortgage lender will never know you had a DMP at all.
One big exception – a mortgage lender can see their own internal records which may go more than six years. So they can still see old problems with the debt they gave even when they aren’t on your credit reports any more.
If your credit record has debts with a much later default date, you can ask for this to be corrected. This also applies if the debts aren’t marked at all as defaulted at all – then you can ask for a default to be added which will mean your credit record becomes “clean” sooner. See What should the default date for a debt be? for more details, including template letters for you to use to get this corrected.
What if your DMP was more recent?
If your debt management only started two years ago, the decision would be harder. Then defaults will still be showing in a couple of years time when you may want to move house – and so will the fact that you made a partial settlement.
Some banks will not consider you if you have any defaults, especially for their best deals. Others will consider you with some defaults, for example if the defaults are over three years old and have also been settled for more than a year before you apply.
This is definitely a situation in which it’s a good idea to talk to mortgage broker about who to apply to as they should know who will and won’t consider you.
There isn’t a “right” answer here as it will depend on your particular situation:
- if you can’t repay your debts in full, I would say it’s generally better to go for partial settlements now, rather than to prolong the DMP until the debts can be repaid in full;
- your creditors may not accept a low full and final settlement offer after only a couple of years. You may decide that there isn’t any point in getting a partial settlement marker on your file if it’s not going to save you much money;
- if you are not short of money so you could repay the debts now, be able to afford the deposit for your next house and you want to move soon, then full payment is the sensible option.
If you want to make a partial settlement offer, read my Guide to Full & Final Settlement offers first.
What if the debts have already dropped off your credit record?
They will not reappear on your credit record whatever happens. Only the creditor will know whether you settled these partially or in full.
Debt collectors prefer you to pay in full but many lenders don’t care!
Debt collectors will often accept a settlement offer – they may have paid very little when they bought your debt. But they would prefer you to pay the whole amount…
So you can sometimes be given unhelpful and even misleading explanations of how a partial settlement will affect your credit record.
Ms F was told the partial settlement will show on her credit record. That’s true. But she wasn’t told that:
- many lenders will ignore this partial settlement flag. They will just be happy you have one less debt that you still owe;
- the partial settlement will only show on your credit record for 6 years if the debt isn’t defauled;
- if the debt is defaulted, it will drop off your credit record 6 years after the default date. Partial settlement does not change this. So it may vanish quite soon!
- if a debt has already dropped off your credit record, it will not reappear if you settle it with a full and final settlement.