If you’re already having debt problems, the chances are your credit rating has already been adversely affected. However, your choice of debt solution could make a difference to your future credit applications, so it’s important to bear this in mind if, for example, you want to apply for a mortgage at some point.
What information appears on your credit file?
If you choose an informal Debt Management plan vs an IVA, it’s possible that this won’t appear on your credit file at all. However, your creditors might ask for a note to be added about your plan. In a way, this could work in your favour as it shows that you’re taking positive action and are committed to paying off your debts.
On the other hand, if the plan isn’t marked on your credit file, you could continue to accrue adverse payment information on the debts you’re paying off. This is because you’ll be paying a lower amount each month than shown in the original credit agreement, which could be recorded as missed payments on your credit file. If this happens and the debts end up defaulting, this information will stay on your file for six years from the date of default.
For an IVA, Bankruptcy and other forms of personal insolvency, the start date will always be marked on your credit file. When your insolvency period comes to an end, another record will be added. These records will both be removed six years after the start date, unless there are unusual circumstances such as a Bankruptcy Restrictions Order.
What happens during the six year period?
During the six years that adverse information appears on your credit file, you’ll find it harder and more expensive to obtain credit. If you’ve been made insolvent, you may also be subject to restrictions around applying for credit during the initial period when your bankruptcy, IVA or DRO is in place.
In any case, it’s a good idea to get your existing debts completely cleared before you even think about applying for more credit. If you’re in an IVA plan, this means waiting until the arrangement or plan has completely finished – which could take six years or more anyway.
What happens after the six year period?
Once the adverse information has dropped off your credit file, you may find it easier and less expensive to obtain credit. However, some lenders will require you to disclose whether you’ve ever been declared bankrupt or insolvent, so you’ll need to be honest about this.
And if you apply to lenders to whom you’ve previously been in debt, you may find they won’t lend to you, as they could still have details of your debts on file.
Regarding mortgage applications, it’s important to note that all forms of personal insolvency could affect your chances of obtaining a mortgage – not just bankruptcy. Your best bet is to speak to a mortgage broker who specialises in helping people with poor credit histories, as they’ll be able to recommend suitable lenders to approach.
When can I start to repair my credit rating?
You can start repairing your credit rating as soon as any restrictions around applying for credit have been lifted. In the case of bankruptcy or a DRO, this could be just 12 months after the order is made against you. However, as already noted, it will be another five years before this information is removed from your credit file, so you may find there’s nothing you can do for the time being.
On the other hand, if you can find a provider that’s willing to lend to you (and your old debts have been wiped out by the DRO or Bankruptcy Order) – go ahead. The sooner you can start building up positive credit information, the better. Start small with a credit card that’s designed for people with poor credit histories. Use it sensibly for small transactions and pay off the balance in full every month. In time, you could try applying for a mobile phone contract or pay-monthly car insurance policy. But be very careful not to over-stretch yourself!