One of the major concerns people have when thinking about an IVA is how his type of debt solution will affect their credit rating. We consider what will happen to your credit rating if you start an IVA.
If you are in a position where you are unable to maintain your debt repayments, the best thing to do is consider a debt management solution. One of the most common solutions for debts of £15,000 or more is the individual voluntary arrangement (IVA).
An IVA allows you to reduce your monthly payments to a manageable amount. The agreement may also allow you to write of a considerable amount of your debt.
However, carrying out an IVA will have a negative effect on your credit rating.
Applications for standard credit
The fact that you have started an IVA will be registered on your credit file for six years. During this time, if you apply for credit, your IVA will show up and lenders will be less likely to want to lend you money.
You IVA will normally last for five years. During this time you are not allowed to apply for a new credit facility such as a credit card or personal loan. As such, the fact that your credit rating has been negatively affected should not be a concern.
Once your IVA is finished, you can apply for this type of credit again although most people do not want to take credit again and prefer to live within their means.
Mortgages and car HP
The negative effect on your credit rating needs to be given more consideration if you are a home owner.
If your current mortgage deal comes to an end while you are in your IVA, your lender will not cancel your mortgage. However you may find difficulty moving to a new lender to get a deter deal. You may therefore have to stay on your current lender's standard variable rate.
You also need to consider your options if you have a car on a lease or HP. When this agreement comes to an end you may not be able to automatically start a new one. Generally speaking you should therefore plan to keep your car until your IVA has finished.
If your lease agreement requires you to make a lump sum payment to allow you to keep your car, this can normally be financed while your IVA is still running. However, you may not be offered the most competitive interest rate.
The effect of doing nothing
While considering the effect that an IVA will have on your credit rating is important, you should also understand how it will be affected if you choose not to do an IVA.
Given that you cannot afford to continue to pay your creditors, unless a friend or family member can pay them for you, it is inevitable that you will start to miss payments.
As this happens, default notices will be issued against you by your creditors and recorded on your credit file.
This will negatively affect your credit rating in the same way as if you had started an IVA. Therefore the issues concerning applying for new credit, changing your mortgage or a car finance agreement will be the same even without an IVA.
If you are facing a serious personal debt problem, it is right to consider how the various options for solving this will affect your credit rating.
However, it is also important to understand that doing nothing and missing or reducing your required monthly creditor payments will also negatively affect your credit rating and cause you similar credit rating issues.
For this reason worrying about the effect on your credit rating is not a sensible reason for not starting a debt solution such as an IVA.
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