If you are thinking about entering into an individual voluntary arrangement (IVA), you are probably wondering how doing so will impact your credit rating. Will your credit rating take a hit? Will you be able to take out new credit if you need it? How long will the IVA affect your credit rating after the arrangement is complete?
How an IVA Impacts Your Credit Rating
Your credit rating will initially decline while you are on an IVA. Creditors will be able to see this information since IVA details are available to the public through the Individual Insolvency Register. If you apply for credit during the IVA, creditors will generally take a look at the register as well as your credit reference file. The file will also contain the details of the IVA, so even if a creditor does not check the register, they will see that you are insolvent.
This may make it difficult to qualify for short-term credit. Even if you qualify, you still may want to avoid borrowing, because you will likely be subject to high interest rates.
Can You Borrow More Credit on an IVA?
As you have probably surmised, the short answer to this question is, “yes.” The more complicated answer is, “maybe.”
If you want to borrow less than £500, you do not need to talk to your Insolvency Practitioner (IP) about it first (though it still may be wise to do so).
If however you want to borrow more than £500, you must get written permission from your IP first.
While this is the general rule, there are exceptions. If you are borrowing to pay for utilities, you may be able to do so without getting the permission.
How Long Will the IVA Affect Your Credit?
The information regarding your IVA will remain in the Individual Insolvency Register throughout the duration of your arrangement, and will be removed from the register three months after your IVA is completed.
The impact on your credit rating lasts a little longer. Generally the IVA will remain on your credit file for six years from the date that your IVA commenced. Most IVAs last 5-6 years. So generally this means the information will come off your file either when your IVA ends, or one year after.
You are Less Likely to Need Credit on an IVA
Nobody is pleased to find out that their credit rating is going to take a hit, and it can be discouraging realising that it may be hard to qualify for a loan when you need it. But let’s take a moment to put this all in perspective.
On an individual voluntary arrangement, your debts are reduced and consolidated into one monthly lump payment you can afford. This amount is calculated after your necessary living expenses.
That means that so long as you are not spending money on anything outside that basic monthly household budget, you are unlikely to need to borrow more credit while you are on your IVA. The whole point of the arrangement is to help you to get on with your life. That means being able to pay your monthly bills each month without worrying about your debt. All your “extra” income will go toward paying off your debts, but you will never be asked to sacrifice rent or utilities for the sake of your creditors.
So can you borrow while on an IVA? Yes. Is it difficult? It is. But will you need to? The IVA is tailored to your situation, so it is a lot less likely you will need to borrow on the IVA than you may think.
An IVA Can Ultimately Be Good for Your Credit
While the IVA is bad for your credit in the short term, think about the long-term implications for your financial future.
Once the IVA is complete, your remaining eligible debts will be discharged. You will move on with a clean slate, released of most of your previous outstanding obligations. Those debts will no longer sit there on your credit file, damaging your rating.
Odds are your credit rating is already pretty low right now. It may take a dip during the IVA, but once the IVA is complete, you will finally have a chance to get back to building credit. Since you will no longer be struggling to pay back an endless cycle of debts and interest you can never catch up on, you will be able to make timely payments going forward.
Have any questions? Call IVA Plan today at 0203 326 9000.