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.
Does credit improve when a DMP ends?
Getting car finance after partial settlements
Can mortgage lenders see my old debts?
Hershies says
I have an overdraft of 2500 defaulted in july 2016 and paying monthly min payment a debt collector still. I have a steady income now and planning to apply for a mortgage as the rest of my credit report is fair. Do you think its a good idea to partially settle this debt by offering anything between 10 to 30% now even though it comes off my credit file in july 2022. Also can i get a mortgage after 3 to 6 months of partially settling this debt as my default is almost 5 year old by that time. I need advice please whether partially settling a overdraft debt in fifth year of default do i still have to wait for an year to apply for the mortgage given i have improved my finances now or can i apply for mortgage immediately after partially settling this debt? thank you
Sara (Debt Camel) says
Is there a default date on your credit record, so this is being marked as in default every month? Or just in arrears?
Hershies says
I have verified in credit karma the date of default is showing as 28th July 2016 and it is marked in D until this September. But in clearscore it is showing the account in default with only last updated date this October and no data mark every month. Thank you
Sara (Debt Camel) says
ok, go back and look at the statutory credit reports for Experian, Equifax and TransUnion. See https://debtcamel.co.uk/best-way-to-check-credit-score/. Those reports are often simpler to read.
Hershies says
Hi Sara,
I have just verified Equifax statutory report and can see the current account is defaulted July-2016 and account settled in August 2016. The same current account is shown with PRA group with default on July 2016 and no markers shown(payment frequency is shown as ‘0’ even though i am paying a set amount to them every month). But the last updated date 4th of this month. So at least the default is there showing July 2016. If i partially settle this now by offering anything between 10 to 30% is it a good idea and does it make difference to any mortgage application that I am planning to in the the next 6 to 8 months? thank you
Sara (Debt Camel) says
If you settle a defaulted debt now, it will still make it very hard to get a moartgage application in the next 6-8 months. Most lenders preder you to have settled problems at least a year before.
It is hard to generalise about whether mortgage lenders will care about a partial settlement. Some may. Some may not. Go through a good broker, don’t just apply direct to a high street lender.
Bob says
For default debt that no longer show on credit file reports. If I arranged a partial payment, will it show on the credit file or is it a case the it has been delisted and will remain as such?
Sara (Debt Camel) says
A debt which dropped off as the default date was more than 6 years ago will NOT reappear if you partially settle it.
If it is a credit card, catalogue or loan, read https://debtcamel.co.uk/settlements-old-debts-cca/ and think if this is worth trying before you offer a settlement.
Ash says
Hi Sara,
4yrs ago I had 6 defaults registered (loans and cards). At the time I had started a DMP. I managed to clear all my debts with partial settlements (by selling my flat).
Since then I have had no debt, with 2yrs to go until the defaults drop off my credit file.
Now I live with my partner who has a mortgaged home (I am not on the mortgage, for these reasons).
We would like to do some home improvements using savings plus a loan. I have a decent f/t salaried income (my partner now only has a small self-employed income).
An eligibility check with Zopa reported that I am ‘pre-approved‘. I am wondering if it would be worth applying given my credit history, i.e., is this likely to be giving ‘false‘ hope and will a full credit search simply identify the defaults and lead to a swift decline?
I realise that you/we cannot pre-empt lenders’ assessment algorithms but is my interest in this type of credit simply premature?
Thanks in anticipation,
Ash
Sara (Debt Camel) says
Well there is no harm in trying, one decline isn’t a major problem.
BUT their interest rates can be pretty horrific. What have they offered you? And this sort of lender has a reputation for being unpleasant and aggressive if you have financial difficulty. You could be a lot better off if you save up for a couple more years then get a loan at a much better rate.
Ash says
It fits with our circumstances to do the works now. Borrowing now is about cash flow – making up 20% of our total works budget.
The rate is 14% which is horrid but perhaps realistic? In any case, we plan to and will have means to overpay and clear early. Is it correct that that could significantly reduce the total interest paid?
Sara (Debt Camel) says
Overpaying will reduce the interest less than you would expect.
Ash says
So if it was a 60month agreement for say 20k and we were able to clear it in 36months instead, what level of overall interest reduction might we hypothetically achieve – at least in terms of ‘low/medium/high‘…?
Sara (Debt Camel) says
Using the MSE overpayment calculator (https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/) which I would expect to be a reasonable approximation:
20k at 13% for 5 years is a monthly repayment of £455. You would repay £27,302 so £14,302 in interest.
If you pay an extra £230 a month, so £685 a month right from the start, you would repay the loan in 3 years and you would have paid £24,172 so £11,172 in interest.
But if you could save up £685 a month, then you would have saved up all £13,000 in just 19 months. No interest paid at all. No risk of a damaged credit score of things go wrong.
Ash says
Thanks Sara for your ever helpful insights and tools.
Mike W says
Hi Sara,
I’ve used debtcamel so much over the years and your articles and knowledge has been so helpful in cleaning up my credit. So thanks, firstly!
I’m soon to be in the position of having a default-free credit report with one exception…
I had a T-Mobile account that was sold to a collections agency (lowell). T-mobile never reported my account to any credit agency. Lowell, however did. The debt is settled and 6 years up at the end of 2021. Ideally I want a mortgage before then though!
My question is, are collections agencies allowed to report defaults when the original creditor didn’t?
Thanks,
Mike
Sara (Debt Camel) says
yes.
Have you repaid this?
how long was it with T mobile when you weren’t paying it before it was sold to lowell?
Mike W says
I made partial settlement 2 years ago.
I do not know how long it was with T-Mobile before it was sold. The first credit records for Lowell start on 03/2017. The default date is 10/2015….this is probably accurate as I stopped paying T-Mobile around 04/2015.
Sara (Debt Camel) says
So the default date is 6 months after you stopped paying, which is correct.
But as the default was settled 2 years ago, you should be OK to get a mortgage now though i- how large a deposit do you have?
Mike W says
About £70k deposit. Job promotion and getting on top of bad habits allowed me to save this.
I’m unsure how the default will affect mortgage rates though.
Thanks again for your reply
Sara (Debt Camel) says
I meant as a percentage deposit.
Well done for workjing your way out of this.
Mike W says
So that would be about 35-40% as I live up north.
Sara (Debt Camel) says
Then I hope you can get a mortgage from a high street bank at a reasonable rate. Talk to a good broker, don’t apply direct to a bank.