Individual Voluntary Arrangements (IVAs) are a popular debt solution in the UK. They allow individuals to make reduced monthly payments towards their unsecured debts for a set period which is usually five or six years. At the end of the IVA term any remaining unsecured debt is written off leaving you debt free and ready to move on with your life. However, people often ask us “Does an IVA affect credit rating”.
While IVAs can offer a lifeline for those struggling with debt, they do have a significant impact on credit ratings. In this article, we’ll look at how IVAs affect credit scores and what steps you can take to improve your rating after the Individual Voluntary Arrangement has completed.
What is an IVA?
An IVA is a legally binding agreement between an individual and their creditors. It’s designed to help people who are struggling with unmanageable debts and can offer a way to avoid bankruptcy. In almost all cases, your creditors agree to write-off the remaining balances following the successful completion of the arrangement.
To qualify for an IVA you must ideally have at least £7,000 of unsecured debt and owe money to two or more creditors. You’ll also need to have a regular income and be able to make monthly payments into the arrangement. The IVA will be managed by a licensed insolvency practitioner who will initially act in the role of Nominee whilst the IVA is being prepared and then as Supervisor once the IVA is approved.
What is a credit rating in the UK?
Your personal credit rating which is also known as a credit score is a three-digit number that’s based on your credit history over the previous six years. It’s used by lenders and financial institutions in conjunction with all of the data held on your credit reference file to assess how likely you are to repay any money you borrow.
In the UK there are 3 main credit reference agencies that keep track of an individual’s credit history. These are Experian, Equifax and TransUnion. These companies track important factors including your payment history and your overall level of debt. The will also keep a log your address history as well as whether you are currently registered on the electoral roll.
Each agency uses a different scoring criteria and not all debts necessarily appear on all three reports so it is advisable to check all three agencies to monitor what details they hold.
How much does an IVA affect my credit rating?
IVAs do have a significant impact on an individual’s credit rating. When you enter into an IVA it will be registered on the government’s individual Insolvency Register will also be recorded with all three credit reference agencies.
The exact impact on your credit report will depend on a range of factors such as the overall level of debt and whether there was already an adverse history from before the IVA. This could include a record of missed payments and whether any creditor had obtained a CCJ against you prior to the IVA. Your credit file can also be adversely affected if you move address frequently or are not registered on the electoral register as these indicate to creditors a lack of stability.
How long does an IVA affect my credit rating?
In most cases the details of an IVA will remain on your credit file for a period of 6 years from when it was first approved. Therefore, if your IVA was for a 5 year period then the IVA will remain on your credit file and affect your credit rating for a further 12-months after it has completed.
The circumstances in which an IVA may remain on your credit file longer than 6 years is if the IVA itself lasts longer than 6 years for any reason (although this is rare).
So what happens if your IVA ends earlier than the standard 5 years due to creditors accepting a full and final settlement offer to end it early? The IVA will still remain registered on your credit files until the 6th anniversary of when it was approved. However, the IVA will be marked as “completed” and you will longer be under any of the financial restrictions of the arrangement.
Can you obtain credit during an IVA?
During an IVA, it can be difficult to obtain credit. Most lenders will see the IVA as a red flag and may be unwilling to lend to you.
However, it is not impossible and you may still be able to obtain credit in certain circumstances. Firstly, most IVAs allow for a credit up to a maximum of £500 in total. You can also continue to pay for items such as car insurance mobile phone contracts on a monthly basis.
If you require credit higher than £500 such as to replace a car on finance then you will need the permission of your insolvency practitioner first. They will likely need to notify creditors of the request and obtain their consent before agreeing to such a request.
Ideally you should refrain from taking on new credit whilst you are in an IVA. If this is not possible then ensure that you comply with the above and also ensure that any new borrowings are affordable and do not impact on your ability to maintain payments into the arrangement.
Does your credit rating improve after the IVA has completed?
Once the IVA has completed it will be marked as satisfied on your credit file. This is a positive sign for lenders as it shows that you have repaid your debts and fulfilled your obligations.
However, your credit rating may not improve immediately as details of the IVA will not be removed until the 6th anniversary which is usually a year after it has completed.
However, your score should improve prior to the IVA being removed simply by it showing as completed. As you will no longer be under the financial restrictions of the arrangement, there are several steps you can now take to begin the process of rebuilding your credit report.
Steps you can take to improve credit score after IVA completion
If you’re looking to improve your credit score after completing an IVA, there are several steps you can take:
- Obtain a copies of all your credit reports – This will give you a good idea of your credit scores across all the agencies and which factors are having an impact.
- Check for errors – Any mistakes on your credit report no matter how small can have an adverse impact on your credit record. It is very important to check for any errors and dispute them with the credit reference agency. Following the successful completion of your IVA you should check that the default dates of any creditors that were part of your IVA are not dated later than the date the IVA was approved.
- Pay bills on time – One of the key things that a creditor will look at when analysing your credit report is your payment history. They want to see that you are making all payments on time. Any missed payments will have a negative impact on your credit score. Therefore, it may be wise to set up direct debits to cover at least the minimum payments and ideally pay more than the minimum each month on credit cards.
- Use credit responsibly – Whilst rebuilding your credit score after an IVA involves the use of credit, its equally important to do so in a responsible way. This means avoiding taking on too much debt and ensuring you can comfortably cover the monthly costs without the need to resort to further credit.
- Consider a credit-builder card – If you’re struggling to obtain finance after an IVA then a credit-building card can be a good option. These cards typically have a low credit limit and high interest rates but they can help you build up a positive credit history if used responsibly. The best advice is to use them to make a small purchase each month then take note of what Martin Lewis recommends and pay the balance in full to avoid interest charges.
- Avoid applying for too much credit at once – Applying for multiple lines of credit at once can be a red flag to lenders and can have a negative impact on your credit score.
- Electoral Roll registration – By ensuring that you are registered at your current address with the electoral roll, creditors will view this as a sign of stability and therefore often gives your credit score a boost.
Are you struggling with debt but have a “perfect” credit score?
At Become Debt Free we often hear from clients who claim they are struggling with the creditor repayments but do not wish to have a negative impact on their credit record. This often means that at the point they contact us, they are up to date with creditor repayments.
The key question you should consider at this point is whether you are only able to maintain your existing creditor repayments is because you are using your existing credit cards and overdrafts in addition to your regular income to maintain your monthly expenditure?
If the answer is no, then great! You probably do not need a debt solution and through better budgeting, you should be able to maintain your ongoing creditor repayments.
However, if you are only able to maintain your creditor commitments through the ongoing use of existing credit, you are likely to run into trouble sooner or later as your existing lines of credit reach their limits. Your ability to borrow money through further credit will eventually run dry. At this point, a single missed payment can have an adverse affect on your credit rating and will remain on your credit file for 6 years.
If you are in this situation and would like some debt advice, please speak with one of our insolvency experts at Become Debt Free on 0800 169 1536 and we can assess your budget and look at how much you owe to determine what debt solutions are suited to your needs.
An Individual Voluntary Arrangement will have a significant impact on your credit scoring for six years. However, most people are in the IVA for five of those six years anyway when there are restrictions on taking on new credit.
Following the IVA you can utilise the above tips to start rebuilding and improving your credit scoring over a period of time in a easy manageable way and put yourself in a better position to achieve your financial goals. Whether you want to apply for a mortgage or purchase a new vehicle, an IVA will not leave a permanent “negative mark” against your credit file once it has completed.