How will an IVA impact my credit score?
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?
How do credit checks 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 IVA’s 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 my credit record after an IVA is complete?
After your IVA is completed you will have the opportunity to build your credit rating back up. Some lenders will not want to lend to you immediately, as they will see it as high risk although over time your credit record will be free of defaults and will stop displaying your Individual Voluntary Arrangement.
So if it has that impact on a credit record why do it?
If your current situation is not sustainable, you may have no choice but to take action. An IVA has many benefits, including generous built in allowances for entertainment, food, eating out and holidays.