When you start a Debt Management Plan or IVA you will stop making the agreed payments towards your debts. If you do this one of the things you are likely to want to know is; ‘What’s the affect on my credit rating?’
Jump to article contents:
- Why is your credit rating important?
- DMP or IVA? Which has a worse affect on my credit rating?
- What will happen if I do nothing?
- Can I manage my debt without any affect on my credit rating?
Need a debt solution but worried about your credit rating? Give us a call (0800 077 6180) or complete the form below to speak to one of our experts.
Why is your credit rating important?
Your credit rating is a key mechanism used for controlling credit in the UK. It is based on data about you and your credit behaviour. Information about all of your lines of credit is recorded on your credit file. It lists how much you owe, whether you are paying on time and if you start to use a debt solution.
The important thing to understand is that all this data stays on your file for 6 years; good or bad! Lenders use your credit file data to give you a credit rating and assess your credit worthiness.
So, if you miss payments on any line of credit or start a debt solution your credit rating will be negatively impacted. Lenders will see this on your credit file when they carry out a credit check against you. As a result they may not lend to you.
Having a poor credit rating should not always be seen as a bad thing. It prevents you from borrowing more money when you cannot pay back debts you already have.
DMP or IVA? Which has a worse affect on my credit rating?
A Debt Management Plan (DMP) and Individual Voluntary Arrangement (IVA) are very different solutions. However both will have a negative impact on your credit rating.
The main difference in terms of credit rating is the fact that if you are in an IVA it is registered on your credit file. The record will remain on your file for 6 years negatively effecting your credit rating it for this length of time.
A DMP is not usually registered on your credit file because it is not a formal insolvency procedure. Given this you may think that starting an IVA is worse for your credit rating. However this is not true.
In a DMP your reduced payments are agreed with your creditors. However they still record the fact that payments are being missed on your credit file. It is also likely they will issue default notices against you. This will negatively affect your credit rating just as much as if you were in an IVA.
Your credit rating might repair faster after using an IVA. The record of the Arrangement and all your debts come off your file after 6 years leaving it absolutely clean. With a DMP your credit rating will not start to repair until your debts have been paid in full which may take longer than 6 years.
What will happen if I do nothing?
You might think that avoiding both a DMP and IVA will enable you to protect your Credit Rating. You are absolutely right if you can afford to continue paying you monthly contractual payments as agreed with the lenders.
However if you cannot afford to maintain your monthly payments you will eventually be forced to start missing them. In terms of your credit rating the result of this will be exactly the same as if you carry out a DMP or IVA. Your creditors will record missed payments and default notices on your credit file. Your credit rating will then be just as badly effected.
Burying your head in the sand is often how debt problems escalate. This can happen fast. Many people struggling with debt use credit to pay for normal household expenses such as petrol or food shopping. This is a real red flag! It proves that you are not able to afford your debt payments as well as your normal living expenses.
Using credit to pay for normal living expenses may protect your credit rating for a while, if you keep up monthly payments. However this should sound the alarm bells that you need debt help fast!
Can I manage my debt without any affect on my Credit Rating?
The only way to manage a debt problem without affecting your credit rating is to use consolidation. This is the process of paying off many smaller loans with one larger one. If done right the result is a lower overall monthly payment and often reduced interest charges.
It may be possible to come to some arrangement with a friend or family member. If they could pay some of the monthly payments until you are able to, then your Credit File wouldn’t be effected. Perhaps they could pay off the total debt and you pay them back informally when you can afford it.
If these options are not available to you then trying a short term fix such as a payday lender might be tempting. This involves borrowing a relatively small amount which is theoretically paid back quickly. However if you are already struggling with debt using these types of loans will normally make things worse.
If you are struggling with debt unless you can increase your income or reduce your expenditure you will need to use a debt solution. The effect this will have on your credit rating should not be a deciding factor. It will not be affected for life. There are ways to repair it once you are debt free.
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