Credit Score Basics > Will your credit score improve when you settle defaults?

Will your credit score improve when you settle defaults?

Wollit Team2 minute read · Updated 17th September 2024

A default happens when you fail to meet the repayment terms of a loan or credit agreement. This can significantly impact credit scores, as you can imagine. However, when you settle a default, depending on how you do it, your ability to get loans can improve. Here is how it works.

What is a credit default?

A credit default is officially recorded when a borrower misses several payments on a loan or credit agreement, leading the lender to close the account. This usually happens after three to six months of missed payments.

How does a default affect your credit score?

Defaults are serious things that can lower your credit score and make it much harder to secure future credit, including loans and mortgages.

As you can expect, defaults can have a severe impact on your credit score. According to Experian, a default can reduce a credit score by up to 350 points on a scale of 1,000.

The size of the debt does not matter; even a small unpaid bill can ruin your score. Also, defaults remain on your credit report for six years, regardless of whether you pay off the debt later.

Will settling a default improve my credit score?

The short answer is no; settling a default does not immediately improve your credit score. Once a default is recorded, it will stay on your credit report for six years, and paying off the debt does not erase the default itself.

However, settling a default can improve your situation.

First, once you pay off the defaulted debt, it will show as "satisfied" on your credit report. While this does not remove the default, it tells potential lenders that you have taken responsibility for the debt. They’ll view this much better than an unpaid default.

Second, if you begin making payments on a defaulted account, the lender is less likely to pursue legal action, which could lead to a court judgment against you (a CCJ). A CCJ is much worse for your credit score and remains on your record for six years as well.

What can I do to improve my credit score after a default?

A default will remain on your credit file for six years from the date it was recorded, regardless of whether you pay off the debt.

After these six years pass, the default will be removed from your credit report, and your credit score may improve as a result.

However, while settling a default by itself may not lead to an immediate jump in your credit score, there are a few things you can do to improve your credit score:

Register to vote: being on the electoral roll can add up to 50 points to your credit score. It helps lenders verify your identity and address.
Maintain a low credit utilisation ratio: aim to use no more than 30% of your available credit limit. This shows that you don’t live on credit.
Pay all bills on time: late payments can further damage your credit score and send you into new defaults.
Add a “Notice of Correction” to your credit report. While this actually doesn’t improve your credit score, it can give some context to lenders. They might understand your situation if, for example, you missed a few payments because you lost your job.
Most importantly, consider signing up to a specialised credit-building tool. One such tool is Wollit.

Wollit works by reporting a fixed-fee monthly subscription as a loan repayment to all credit reference agencies. This helps you build a history of timely debt repayments, which is the main factor that matters for your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders you pay your bills on time, helping you reduce the impact of a single default (especially a settled one) in your overall credit file.