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 an 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:
- a debt which has been defaulted will drop off your credit file six years after the default date. This is going to happen whether it is paid in full or settled partially;
- a debt that is marked as AP (arrangement to pay) or DM (debt management) will stay for six years from the date it is are settled.
So you need to check your credit records and see how each debt has been marked.
What should have happened for this case?
Debts should be marked as defaulted when you are between three and six months in arrears. If, like Ms F, your DMP has quite a way to go, I’m guessing that your monthly payments are quite low. So your debts should probably have been defaulted in the first year of your DMP.
In that case, if you settle the debts partially now, all trace of them will be gone in a couple of years when you move house. A mortgage lender will never know you had a DMP at all. (There is one exception here. A mortgage lender can see their own internal records which may go more than six years. If you are worried about this, make sure you apply for a mortgage to a bank you didn’t owe any money to!)
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.