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How will a Debt Relief Order affect my credit rating?

How will a Debt Relief Order affect my credit rating?

What does a Debt Relief Order do to you credit score?If you start a Debt Relief Order (DRO) your credit rating will become worse. Unfortunately this is unavoidable. The fact that you are in a DRO will be recorded on your credit file and will show up if anyone carries out a credit check against you.

The record of your DRO will remain on your credit file for 6 years from the date it started. This means that your credit rating with continue to be negatively affected after you are discharged which is normally 12 months from the start date.

After six years have passed the record of your DRO will be automatically taken off your credit file.

BMD Tip: It is possible that your creditors will record a formal a default notice against you after the date that your DRO started. This default notice will also be recorded on your credit file and remain there for 6 years from the date it was issued. As such it is possible for a default notice to remain on your file after the record of your DRO has been taken off thus extending the time that your credit rating is affected.

Using credit while you are in a DRO

The fact that your DRO is recorded on your credit file is likely to stop normal high street lenders from giving you more credit. If you apply for credit they will carry out a credit check against you which you will normally fail.

However there are other forms of credit that you can continue to use while you are in a DRO:

Mobile phone contracts
If you have a mobile phone which is on contract and the monthly payments are reasonable then there is no reason why you will not be able to continue using this credit facility while your DRO is in place. However you will not normally be able to get a new contract with a different service provider until your credit rating starts to improve.

Pay monthly car insurance
If you are paying your car insurance on a monthly payment agreement this will be unaffected if you start a DRO. The only issue you may have is if your car insurance comes up for renewal while you are still in the arrangement. If this is the case then you should be able to renew your insurance on a similar pay monthly deal with the same insurer. However you may struggle to get a pay monthly deal with a  different insurer.

Payday loans
Payday loans companies do not use the same credit rating criteria as standard high street lenders. You may therefore still be accepted for a payday loan even while you are in a DRO. However it is advisable not to borrow more money in this way until you are discharged.

BMD Tip: If you are considering applying for a payday loan or any other credit while you are in a DRO you need to be aware it is against the law for you to borrow more than £500 without first declaring to the person you wish to borrow from that you are in a DRO.

Should I be worried about how a DRO will affect my credit rating?

The affect on your credit rating is often something that is a key worry if you are deciding whether or not to start a DRO. However should it be?

The fact is that you would not be considering a DRO unless you were already struggling with debt or you believe you will have a debt problem in the near future. If this is the case it is inevitable that you will eventually reach the point where you are no longer able to pay your creditors. When you reach that point your credit rating will become poor anyway.

The reason for this is that as soon as you start missing your agreed monthly payments or paying reduced payments your creditors will record missed payments on your credit file and even issue default notices against you. This will cause your credit rating to become poor and make it extremely difficult to take new credit.

In reality the fact that you start a DRO will therefore not make your credit rating much worse than it will get anyway if you are unable to pay your debts. As such the affect that the arrangement will have on your credit rating should not be a primary factor when deciding whether or not to go bankrupt.

Will I be able to get a mortgage after a DRO?

If you are planning to start a DRO you will not currently be a home owner. However you might be keen to understand whether you will ever be in a position able to get a mortgage and buy a house after you have finished a DRO. The answer to this is yes. However it is important to understand that you will not be able to apply for a new mortgage until sometime after you have been discharged.

You will normally be able to find a sub-prime mortgage lender who is willing to give you a mortgage between 2-3 years after you are discharged from your DRO. A sub-prime mortgage lender is a lender who is prepared to lend to someone even though they still have a poor credit rating. However you will also need a reasonable deposit which will could take you some time to save for.

BMD Tip: Using a subprime mortgage lender will enable you to get on the mortgage ladder if you need to. However the interest charged on the mortgage will be far higher than that which a standard high street lender will offer. As such if at all possible it is better to wait a bit longer before applying for a mortgage after finishing a DRO.

Generally speaking in order to get the best mortgage deal possible you should wait until 6 years since the date your DRO started  before you apply for a new mortgage. This will mean that the record is no longer on your credit file and you have had a chance to start improving your credit rating before you make the application.

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