When I am talking to people about debt solutions they will often ask whether their credit score will be affected differently depending on whether they undertake a Debt Management Plan, Individual Voluntary Arrangement (IVA) or Bankruptcy. All of these debt solutions negatively affect your credit rating. Therefore understanding whether there is a difference depending on the solution may help you decide which is the best for you to use.

How will a Debt Management Plan affect your credit score?

One of the most common debt solutions is the Debt management Plan (DMP). This reduces the amount that you pay to your creditors each month to an affordable amount. However when you start the Plan you are breaking the original credit repayment agreement.

Given this even if your creditors agree to your reduced payments they will still record late payments and default notices on your credit file. This will certainly affect your credit rating negatively. In turn you will be prevented from getting credit from most high street lenders.

Late payment notices will normally continue to be issued until your debts are paid off which could take a very long time. As such, using a debt management plan will normally mean your credit score will remain effected for many years.

How will an IVA affect your credit score?

If you start an Individual Voluntary Arrangement (IVA) the fact that you have entered into the Arrangement will be recorded on your credit file for 6 years. This will of course negatively effect your credit rating and prevent you from getting most forms of credit.

However the IVA has an advantage over a Debt management Plan in the fact that it lasts for a fixed period of time. Normally it will be completed after 5-6 years. At this stage a notice of satisfaction will be recorded on your credit file.

If you complete your IVA in less than 6 years the record that it existed will remain on your credit file for the full 6 year period. However from the date that the notice of satisfaction is issued any potential lenders are aware that all historic debts have been settled. You can then start taking action to improve your credit rating. Given this it can be argued that as far as your credit rating goes an IVA might be a better solution than a DMP. If you use an IVA it is likely that your credit rating will start to repair faster.

How will Bankruptcy affect your credit score?

If you go Bankrupt then just like if you started an IVA it will be recorded on your credit file for 6 years. This will of course effect your credit score.

Although the record of the bankruptcy will remain on your credit file for 6 years you will normally be discharged after 12 months. A notice of discharge will then be recorded on your credit file and from this point potential lenders may start taking a more favourable lending view.

BMD Tip: As soon as you are discharged from Bankruptcy there are things you can do to start to improve your credit rating. These include changing any errors on your credit file and using a credit repair credit card. If you use these you could find that your credit rating improves even faster than if you had gone through and IVA.

Your Credit Rating is not the only thing to consider when choosing a Debt Solution

Having learned how out each of the different debt management solutions above will affect your credit rating you might conclude that bankruptcy is the best solution to choose. After going bankrupt it is likely that your credit rating will repair in the fastest time.

However how your credit score will be affected is not the only thing you need to consider when deciding which solution is right for you. If you have a debt problem my recommendation is that that your first priority should be to worry about resolving the problem in the best way for your circumstances. Being able to borrow again at a later date should actually be a secondary consideration.