Settle or Pay Loan in Full?

[DietCokeandLime]

I had a loan with a bank and I got into a bit of a mess financially. I missed some payments and the loan defaulted and went to a collections agency. It's £4800 and I'm paying it off at £50 a month currently. I just checked my credit report and it is a big, red blotch on there at the moment.

I want to get rid of this and start rebuilding my credit score. I am also wanting to leave a difficult relationship.

I have recently inherited £5000. This is the only "chunk" of money I am likely to ever have and money is very tight for the forseeable future and I would love to keep some of it as emergency savings. I don't ever want to get any more credit again but I may need to be credit checked in order to get the mortgage put in my name, or if I want to change my job. It's all such a mess.

The company have said they would accept a settlement but I know these still show negatively on a credit score, but - how negatively? Would it be worth doing to have some funds?

It depends on whether or not it would affect my decision to leave my relationship, whether or not I was in a vulnerable position, so many factors

Ultimately I would probably clear the debt if I was safe and had freedom to make choices. Getting rid of debt is a huge weight lifted and changed how you feel. Plus it's the moral thing to do

Actually I’d put it aside as an emergency fund in your circumstances until things settle, you’ve got a payment plan set up and £50 pm is quite small compared to the lump sum which you might need fro facilitate your move.

How recent was your default? That stays on your credit record for 6 years from the point of either you defaulting or you acknowledging the debt, and will almost certainly prevent you from taking over the mortgage until that six years has expired. It makes no significant difference whether you pay the debt off - a settled default is looked upon somewhat more positively, but does not disappear the default. On that basis, I’d continue with your payment plan and keep the inheritance as rainy day savings.

Within the last year. I know it wouldn't disappear the default, but if I paid it off in full as opposed to settling it, would it make a worthwhile improvement to my credit score - push me into fair rather than poor for example.

That reply was to @ComtesseDeSpair

Settling the credit will have the same impact as a default...it’ll still be there for up to 6 years just your score might come up a bit quicker. Keep the payment plan and save your money as a backup. Like you said you never get this kind of money

Sett

Settle the loans for the smallest amount you can. At six years post default they will fall off your credit report.

Paying them off in full will do nothing for your credit score.

@DietCokeandLime

Within the last year. I know it wouldn't disappear the default, but if I paid it off in full as opposed to settling it, would it make a worthwhile improvement to my credit score - push me into fair rather than poor for example.

No, sadly.

Offering a lump sum as a full and final settlement is probably the way to go.

Tell them you have a lump sum and have £2500 available to settle the debt with no further payment due. They might come back with a counter offer, eg £3k, but they're probably happy to get a delinquent loan off their books rather than have repayments drip in at £50 pm.

That way you get this loan done with and keep some money back to help you move on in life.

I’d offer 2k and see what they say. It will affect a mortgage check but you already have that anyway. Least this way it’s paid off

You can’t improve your credit score now that the default is on there by paying the loan in full - settling for as little as possible will have the exact same effect.

Your credit score will keep improving the further you get from the defaults so settle it and keep as much back as you can do that you have a cushion to prevent you needing a loan again.

With the mortgage I think you’re probably going to need to accept you won’t be able to take it on in the near future.

I am a Debt Advisor. The previous posters are correct, your credit score won't be improved by paying off the loan in full or in part now that the default is registered. Therefore I'd offer £1.5/2k max. as a full & final settlement. This will likely be accepted.

In terms of the mortgage/remortgage, use an IFA. There are plenty of mortgages out there for people with less than ideal credit histories but you may need help to find them.

If/when the settlement is accepted and paid, I'd consider getting a credit card through your bank and using for food or petrol and paying it off IN FULL each month. This won't help with the default but will help your credit score.

I know it's easy for me to say, but try not to worry too much about the number on your credit score. In reality it's just a number and doesn't affect you day to day. People get really hung up on the number or score fair/poor etc. It really isn't that important.

@debtadviceflowerofscotland thank you. I do have a couple of credit cards that have £0 balances on them, would using one of these (paying in full each month) have the same effect as getting a new one?

My mortgage account is perfect, never late with a payment, and in fact I slightly overpay (only around £20 something per month). Would they take that into consideration as part of a credit check, or when companies credit check you do they literally just look at the number of your score?

It won't make the slightest bit of difference. My friend paid off in full - she had got in a pickle due to temporarily leaving work to car for a relative who subsequently died. She had 2 credit cards default, one she paid in full the other she settled both paid from the inheritance. Both debts she had to keep nagging to remove the fact both were listed on Experian as not paid off which obviously was affecting her credit score, she's now 5 years on, and one of the two STILL hasn't done this - yet they sent her a cheque for £1200 last week as they realised they'd made errors in dealing with her case.

[quote DietCokeandLime]@debtadviceflowerofscotland thank you. I do have a couple of credit cards that have £0 balances on them, would using one of these (paying in full each month) have the same effect as getting a new one?

My mortgage account is perfect, never late with a payment, and in fact I slightly overpay (only around £20 something per month). Would they take that into consideration as part of a credit check, or when companies credit check you do they literally just look at the number of your score?[/quote]
The more well-maintained credit accounts you have, the better. So using one of your existing credit cards to put e.g. food and petrol on, and paying it off in full by direct debit every month will be a positive. Leave the other card at £0, because they also want to see that you are not maxing out the credit available to you - that also factors into your score and will help.

The mortgage overpayments won't count, but it's good to do regardless.

When companies credit check you they don't use 'the number of your score' i.e. the one that Experian or whatever publish to you. That's just a general indication and you shouldn't get hung up on it. If you're not applying for more credit cards or loans, or signing up to interest-free credit on big purchases like sofas or whatever, then really you don't need to worry. When you come to apply for a mortgage, your current income, outgoings, deposit/equity/LTV are all going to be more important to them. They use their own systems so 'your credit score' number is just an indication.

Settle the defaulted debt as cheaply as you can.
Keep an eye on your record to make sure it's marked as 'settled'.
Use your pay-off-in-full credit card.
Try not to worry!

@NoSquirrels thank you for that, your message has made me feel a lot less worried.