A reader has asked how Full & Final settlements (F&Fs) would affect her credit rating which is currently looking good as her debts were all defaulted and have dropped off her credit record.
A full and final settlement happens when the creditors agrees to accept an amount which is less that the total owed to settle a debt, and agrees that the debtor will not be pursued for the remainder. For more details, see this Guide to Full & Final settlements.
This article looks at how F&Fs are shown on a credit record in the two different situations:
- where the debts are still showing on your credit record, and
- where the debts have already disappeared.
Lenders often say that a partial settlement will be very bad for your credit record… but often it won’t be! So it’s good to know all the details.
Some different names for this
F&F settlements are often called partial settlements, because you don’t pay the full amount, only part of it.
Creditors usually mark the debt as partially settled on your credit record rather than settled.
If the debt has previously defaulted, the term settled is not used and the term satisfied is used instead. A F&F settlement on a defaulted debt is then marked as partially satisfied. I talk here about settled debts because that is is how creditors normally talk to you, even though the credit record term is normally satisfied.
Debts that still show on your credit record
When you settle debt, partially or in full, the balance is set to zero. The debt will then disappear from your credit record six years after the original default date.
If the debt hasn’t defaulted, it will disappear six years after the settlement date. But it is unusual for a creditor to accept a F&F unless a debt has defaulted. You may want to ask for a default to be added, see What should the default date for a debt be? for more about this.
It is common for a creditor to tell you that the debt will stay for six years from the settlement date.
This isn’t right if there is a default date on the record! It will drop off six years from the default date whatever you do.
How does a partial settlement affect your credit rating?
Your credit score is a complicated calculation looking at lots of different factors.
Partial settlement is a marker against a debt, That marker isn’t taken into account in the credit scores published by Experian, Equifax and TransUnion that you see when you look at a credit report.
Lenders don’t use the credit scores that you can see. Each lender can have their own rules about what is on your credit record that they want to take into account.
So it’s possible a lender may see a partial settlement marker and decide not to lend to you. This is only really likely though for very large credit applications – mortgage or car finance say.
Most lenders won’t care if you have partially settled the debt. They may think it’s good that a debt is gone – because with one problem less, you are more likely to be able to repay what you borrow from them!
And some lenders will reject you just because there was a default, even if you have settled the debt in full!
So it can be hard to decide if paying the extra money is worth it – there may only be a tiny number of lender that may make a different decision if you partially settle or fully settle a debt.
Think about the size of the discount you can get and how long the debt will stay on your credit record. For example:
- if the creditor will accept £500 to settle a £1,500 debt that is a big discount. And if the debt will drop off in the next year, it’s probably a good idea to grab it!
- if the creditors will only accept £1,300 to settle that £1,500 and the debt is still going to show for another four years, you may think it’s worth paying more to get the debt marked as fully settled.
The rest of your financial position also matters:
- with lots of problems on your credit record, getting one debt marked as partially or fully settled probably won’t make much difference at all;
- if you can’t afford to repay all your problem debts, it’s usually better to settle as many as possible partially, rather than take longer to repay them in full.
Wanting a mortgage is the most difficult situation – I look at it in detail in Will partial settlement make getting a mortgage harder?
Debts that have disappeared from your credit record
A defaulted debt drops off your credit file after 6 years, which is why the questioner is no longer seeing these old debts on her record. But would settling one bring back the debt? You can see why she wouldn’t want her new, clean credit record spoiled by having some partial settlement indicators added to it…
The answer is simple – after a defaulted debt has gone from a credit record, it will never re-appear. You can offer a F&F settlement on these debts and not risk them coming back and damaging your credit score. If a creditor tells you that a partial settlement will be shown on your credit record for another six years, they are wrong.
This also applies to CCJs that have dropped off after 6 years. They will not reappear if you settle them with a partial settlement.
Once a debt with a default or a CCJ has gone from your credit file, the only lender that will know about it the original creditor. So don’t make the mistake of applying for a mortgage to NatWest if you originally defaulted to RBS, or to Halifax if you defaulted on a Lloyds debt.
Unfortunately people are often given wrong information about this by customer service staff at debt purchasers.
Why offer a F&F if the debts have disappeared?
You might wonder why the questioner would bother making Full and Final offers on debts which have disappeared from a credit record. There are two reasons why trying to settle old debts is a good idea:
- a debt that isn’t showing on your credit record still exists. Unless it is statute-barred the creditor can still chase you for the money. See Do I still have to pay a debt which isn’t on my credit record? for more details.
- if you apply for a mortgage or a re-mortgage the lender is likely to ask about all your debts, not just check your credit record.
So as defaulted old debts can often be settled for low Full and Final offers, it makes a lot of sense for the questioner to try to deal with hers.