Credit Score Basics > How do partially settled debts affect credit?

How do partially settled debts affect credit?

Wollit Team2 minute read · Updated 18th September 2024

When dealing with debt, it may be sometimes useful to negotiate a partial settlement, which means paying back only part of what you owe.

This option can seem attractive, especially if money is tight. However, while settling a debt is better than ignoring it completely, having a "partially settled" mark on your credit report can still affect your borrowing options.

Here’s how this works and what you can do about it.

What is a partial settlement?

A partial settlement happens when you agree with a creditor to pay back less than the full amount of your debt. For example, if you owe £1,500, you might negotiate to pay £500 as a settlement. Once the creditor accepts this offer, the rest of the debt is usually written off.

Partial settlements have a few advantages:

If you're struggling to pay your full debt, settling for a lower amount can give you immediate help.
For some people, partial settlements can be a way to avoid more serious actions like bankruptcy.
Plus, paying a lump sum can help you clear debts faster than making monthly payments over a long time.

However, they do come with disadvantages, particularly when it comes to how these debts look like on your credit report.

How do partially settled debts affect my credit?

When you settle a debt partially, it will show up on your credit report as "partially settled." This means that while you have paid off part of the debt, you were supposed to pay back more.

The good news is that a partially settled debt doesn’t necessarily lower your credit score. The bad news is that lenders may view a partial settlement as a sign of financial trouble. While some may see it as responsible action to resolve debt, others may worry about your ability to manage credit in the future.

Plus, this partially settled debt will stay on your credit report for six years from the date of settlement. During this time, it might affect your ability to get new credit somewhat.

How do lenders see partially settled debts?

Not all lenders view partially settled debts the same way. Some may be more lenient than others.

For example, when applying for a mortgage, lenders often look closely at your credit history. A partially settled debt could make them a bit hesitant to approve your application.

Also, when it comes to personal loans, lenders may still approve them but might charge higher interest rates due to perceived risk.

However, you should not stress too much about it. A partially settled debt is better than a default. If you have other positive factors in your credit history (like timely payments), lenders may overlook a partial settlement.

In fact, if the amount settled is small compared to your overall financial picture, lenders might not see it as a significant issue at all. And if you've shown good financial behaviour since, then this can also make lenders approve you.

At the end of the day, though, what lenders care most about is your recent credit history and how consistent you are. Luckily, now there are many apps that can help you build and improve credit.

One such app is Wollit. Wollit is an app that reports your monthly subscription as loan repayment, helping you build a history of timely repayments without the risk of getting hit with high-interest charges or going over your card limit. It can even report your monthly rent payment to Experian, adding another line in your credit report that shows lenders you're responsible and pay your bills on time.