IVAs And Your Credit Rating
Are you worrying about what an IVA could do to your credit rating so much you haven’t yet taken any steps to tackle your debt problem? If debt threatens to overwhelm you or bankruptcy is looking increasingly likely, an IVA could be the last chance you have to do something about the situation before your creditors take action against you. But is the fear of ruining your credit score stopping you? What do you do when you want to clear your debt but feel your credit record is standing in your way?
The first thing is to understand how credit ratings work…
Every single credit transaction you perform in the UK is kept as a permanent detailed record of how you use credit. Every single adult in the UK has a record and it tells our creditors a story about our financial lives so they can base their decisions about our credit worthiness upon our lending history. They check for things like whether we’ve been bankrupt before, or whether we have defaulted on a payment and run up arrears, or are we carrying too much debt or have too much credit?
What a lender looks for - their wish-list for a perfect debtor - is different for every single person, but one thing they all do is add or deduct points for various factors such as:
- Our existing amount of credit
- Our pattern of spending money
- How much debt we carry
- What payments we have defaulted on
- What interest rates we pay
Once a lender has added up all the points the final score determines if they will lend us more credit. Under that score and we’re accepted. Over that score and we’re rejected.
Why a lender loves a responsible debtor
Lenders love responsible debtors, that is they love having customers who have a good track record of taking out credit and paying it back with interest. Someone who borrows little and pays everything back in full quickly doesn’t generate enough money for the lender. That’s why lenders use credit ratings to find which customer is which – a responsible borrower who generates lots of interest payments may have a high score while someone with little credit history - even though in reality it means they borrow little money and live within their means – would be considered a poor customer.
It doesn’t sound right that the person always borrowing money should have a higher score than someone who doesn’t, but the banking system is based on making profits – and conscientious people who live within their means don’t generate enough profit for lenders!
What effect do IVAs have on credit ratings?
The truth is they can have a very negative impact on credit ratings because it is a clear sign you cannot manage your money alone anymore and have asked a professional to step in. Don’t forget that one aspect of an IVA is that any debt left at the end of the 5-year term is written off, which means the lender will lose money! This will make lenders very nervous about offering you credit after your have finished your IVA.
BUT, this doesn’t mean you have to dismiss IVAs as a debt solution. If you are already at the point where you are one step away from bankruptcy or your debts are out of control, your credit rating already shows the financial trouble you are in. The nature of credit records means you cannot hide anything from a lender.
You have probably defaulted on payments before, and that will be recorded. You may have almost exhausted all avenues of credit and be up to your limit with lenders declining your applications – that too will show. Your debt may even exceed your income and they will know that too. At this point you have nothing to lose any more, which is why if your circumstances are suitable and you fulfil the criteria for having one, you need to consider IVA as a serious debt management tool to start tackling the problem before your creditors take action.
What happens to credit record after an IVA is complete?
An IVA will stay on your credit record for many years – that’s unavoidable – and it will make your debt-free life a little hard in the beginning, especially if you want to get a mortgage. If you need to obtain credit you will have to spend time rebuilding your credit record and show that you have overcome your difficulties and can be trusted again.
So if it has that impact on a credit record why do it?
Because of the massive benefits you will get. An Insolvency Practitioner to take over your finances and guide you back on track. Your creditors will leave you alone as it will be against the law for them to chase you while you have your IVA. You will have enough money for your living expenses and not worry about how you’re going to find the bill money because you need to make huge debt payments. But most of all you’ll feel a weight lift your shoulders and be optimistic once more about the prospect of a happier debt-free future.
To find out more about IVAs and whether they are right for you, call now and speak to one of our experienced IVA advisers now on 0800 987 5337
Example Unsecured Debts
|2||Credit card 1||£6,812|
|3||Credit card 2||£4,092|
|4||Credit card 3||£5,399|
|4||Credit card 4||£5,200|
Your Monthly Repayments Would Be
an IVA £748
(total contractual repayments)
an IVA £295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances. For more information on our fees click here