Affect on my credit rating – DMP or IVA

Affect on my credit rating – DMP or IVA

Many people who are in debt have a good credit rating because they are keeping up payments. Once you stop normal payments and take on a debt solution the question is; ‘What’s the affect on my credit rating?’

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Affect on my credit rating?

Your credit rating is a really important mechanism for controlling credit in the UK. It is based on data about you and your credit behaviour. It lists all of your lines of credit, how much is owed and when you pay them. It also records when you miss payments or if you take on any debt solutions.

The important thing to note is that all this data stays on your file for 6 years; good or bad! It should actually help prevent people from getting into debt. Lenders should use your credit file data to ensure they are only allowing credit to people who can afford to repay it.

So, if you take on any debt solution or indeed miss payments (defaults) to any line of credit, then your Credit File will be negatively impacted. Lenders must lend money responsibly and will only want to give credit when they feel confident it will be repaid.

Your credit rating being negatively impacted 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.

Is an IVA or DMP worse for my credit rating

A Debt Management Plan (DMP) and Individual Voluntary Arrangement (IVA) are very different solutions. However starting either solution will normally result in the creditors issuing a default notice against you.

The main difference between an IVA and DMP in terms of credit rating is the fact that if you are in an IVA it is registered on your credit file. This does not happen if you use a DMP because it is not a formal insolvency procedure.

Given this you may think that starting an IVA is worse for your credit rating. However in fact it might mean that your credit rating repairs faster. After an IVA has finished any outstanding debt is written off. The record of the Arrangement then comes off your credit file a year later (after 6 years in total). Then you can start to repair your credit rating once again.

If you are using a DMP your credit rating will not start to repair until your debts have been paid in full. Depending on the amount you are able to repay each month this could take far longer than 6 years.

What if I do neither solution?

You might think that avoiding either solution will enable you to somehow protect your Credit Rating. However the only way to do this is to continue paying the monthly contractual payments.

If you do nothing to solve a debt problem there will come a point where you are simply unable to continue making the monthly repayments. In terms of your credit rating, the result of this will be exactly the same result as if you carry out a DMP or IVA.  Your creditors will issue default notices against you and your credit rating will be 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 stop any affect on my Credit Rating?

In fact, if you are serious about taking back control of your finances, your credit rating should not be a deciding factor. It will not be effected for life. There are ways to repair it once you have settled your debts.

Payday lenders are very tempting when facing a shortage each month. They are often small amounts and theoretically are paid back quickly. However this often does not work and simply increases the total debt.

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.

Unless you can increase your income or reduce your expenditure, your debts will remain unaffordable. You will need to consider a debt solution.

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