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Debt Settlement Offers and your credit score


Debt Settlement Offers and your credit score

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One solution to your debt problems could be a DSO, a Debt Settlement Offer. This is a solution which is initiated and negotiated by you as you contact your creditors and offer them a lump sum payment in exchange for the remainder of your debts being written off. You may get this lump sum payment from a family member, inheritance, or any other windfall. When deciding whether this a good solution for you, an important factor to consider is its effect on your credit score.

Your credit score is a number which assesses how trustworthy you appear to lenders. It is based on your credit file which has details such as your debts and any past insolvency procedures. Lenders use this to assess whether they want to give you a loan, and what interest rate they should give you if they do. If you are trying to get on top of your debts so that you can start a financial goal, such as a new car or a mortgage, then it is vital that you understand how your credit file works.

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Your Credit Reference File

After you have worked out how much you have to offer to each lender, you need to write a letter to your creditors asking them to consider this offer. When you write this letter, it is important that you include a condition to have your credit reference file details changed on receipt of the payment to reflect that you paid your debt. This means that:

  • Your account should be shown as ‘closed’
  • Your balance should be ‘zero’
  • You may have a note on your account that says ‘partial settlement’, or ‘P flag’.

A partial settlement note is the aspect that may affect your credit score, and, therefore, your ability to take out further credit. Lenders may interpret the ‘P flag’ as evidence that you struggled with debt in the past and, therefore, that you may not be a reliable person to lend to. But, don’t worry, like most things, this mark on your credit reference file will be removed after six years.

It is notable that, compared to other notes on your credit file, ‘partial settlements’ are not always factored into your actual credit score. This doesn’t stop a lender from researching into your financial past, and, if anything, a ‘partial settlement’ may result in a little closer research, but, generally, if the rest of your credit file demonstrates positive past repayment and is otherwise positive, it might not negatively impact a lender’s opinion of you. For more information about DSOs, click here.