What Happens To My Credit Rating If I Do An Iva Or Dmp?

Using an individual voluntary arrangement or debt management plan could be the best way to resolve your personal debt problem but be aware of how your credit rating will be affected.

Your credit rating is the way that banks measure whether or not they should lend to you.
Each time you apply for credit, the bank will look at your credit file to see a record of your borrowing and repaying money in the past. They will then rate you according to their lending criteria and decide whether to lend to you or not.

This process is used when you apply for all types of credit from a mortgage to car finance and even taking out a mobile phone contract.

Your credit rating will get worse if you default on your current credit agreements - i.e. you do not pay back the money you owe on time or if you miss payments.

Late or missed payments are always recorded on your credit file. They give an indication to any lender that you are struggling to repay what you have already borrowed and this will probably mean that they will not want to lend you more until these problems are resolved.

Credit rating affected

If you have a debt problem and are considering using an individual voluntary arrangement (IVA) or debt management plan (DMP), it is important to understand that these solutions will affect your credit rating.

One of the key elements to both an IVA and DMP is that your original credit agreements are broken allowing you to make reduced payments each month based on what you can afford.

When you start one of these plans, even though it is agreed with your creditors, they will still record on your credit file that you have done so and that you have defaulted on your payments.

This will then show up if you apply for more credit and may prevent you from being able to borrow more money.

Not an excuse to avoid a debt problem

The fact that your credit rating will be made worse must not stop you from using an IVA or DMP to resolve a debt problem.

If you are struggling to repay what you owe, you are probably only managing to maintain the minimum monthly payments to creditors by borrowing from one to pay another.

If you continue to do this, your problem will get worse as the amount of your debt will increase. Eventually, you will be unable to borrow anymore and you will be forced to start missing payments.

At this point, your credit rating will be affected in exactly the same way as if you start a DMP or IVA. However your delay in implementing a solution will have resulted in you owing much more and possibly limit the options you now have open to you.

Borrowing again in the future

Using an IVA or DMP to help resolve a debt problem does not mean that you will never be able to borrow again.

Once your debts have been settled or paid, your credit rating will begin to repair again.

The length of time it takes for this to happen will very much depend on the type of debt management solution you use and the type of credit you want.

If you are keen to take a mortgage, this could well be possible very soon after your debts have been paid or even while you are still in an IVA or DMP.

If you want a new credit card, you may have to wait a little longer or start with a very low credit limit.

If you use an IVA or DMP it is important to understand that your credit rating will be affected. However, this should not stop you from tackling a personal debt problem. If you try to protect your credit rating by continuing to making payments funded by more borrowing, you will make your situation worse.

As such, if you are in debt, the best advice is to focus on resolving the problem first. This may take time, but once done, your credit rating will begin to repair and you will be able to borrow again.

About the Author

Steve Jackson is a debt adviser from BeatMyDebt.com in the UK. For more quality and unbiased information on Personal Debt Solutions, visit our website at www.beatmydebt.com