An Individual Voluntary Arrangement (IVA) is a great debt solution for individuals who are struggling with paying off their debts.
However, just like most other debt solutions, an IVA also has a fairly severe and negative impact on your credit rating.
In this post, I’ll be looking at the ways in which an IVA will affect your credit report and how you should prepare for it.
What is an IVA?
An IVA is a formal and legally-binding agreement between you and your creditors which states that you will make monthly payments to them for a set amount of time.
After this time period is over, your debt will be considered completely paid off even if the total amount of money you’ve paid is actually lower than what you owe.
A typical IVA lasts about five years.
The great thing about an IVA is that it is affordable. You, as the debtor, are protected by your insolvency practitioner.
An insolvency practitioner is an individual that helps you set up your IVA and deals with you and your creditors throughout the entire process.
He/she also makes sure that the monthly payments you’re making are indeed affordable to you.
While an IVA is definitely a great way of taking care of your debts, there are some pitfalls which you need to be aware of as well.
For example, you may have to take out a remortgage against your house in the final year of your IVA.
Another thing to note about IVAs is that they have an immensely significant negative impact on your credit rating.
What is Credit Score and what does it Represent?
Your credit score is a three-digit number which is essentially a measure of how financially disciplined you are. It’s an estimate of how reliably you can back money that you borrowed.
Your credit file is a document which has details about all of your financial dealings in the past six years.
Any time you take out credit, a record of this is made in your credit file.
If you keep making your repayments to your loans on time and in full, then your credit file will reflect this and your credit score will start to go up.
However, if you miss repayments and are irresponsible with paying your money back, then this will also be recorded in your credit file and as a result, your credit rating will go down.
Your credit report is generated by credit reference agencies who compile your financial history and then use this information to generate your credit score.
Whenever you apply for a loan or a credit card or any other type of credit, lenders look up your credit report in order to get an estimate of how risky of a borrower you will be.
Obviously, having a good credit score will help you obtain credit with a lot less difficulty. If you have a low credit score, you may find that you’ll have trouble getting approved for most types of traditional credit.
With a low credit score, you may have to deal with specialised lenders who will charge you very high rates of interest.
So, How will an IVA Affect My Credit Score?
When your IVA proposal is successful and your IVA gets set up, then a record of your IVA is entered within your credit report.
Having the mention of an IVA within your credit report will result in your credit score going down drastically.
Furthermore, the mention of an IVA will also prevent you from obtaining any type of credit above £500.
Hence, an IVA severely affects your ability to obtain any type of credit.
So, now the question is: how long will an IVA remain on your credit report?
|For a standard IVA that lasts five years, the mention of your IVA will remain in your credit report for six years since the date it was registered. So, for a standard IVA, it lasts for 12 months in your credit file after the IVA ends.|
It’s important to note that the IVA does not get removed from your credit file earlier if your IVA ends early. It is simply marked as “complete” within your credit file.
Is it Possible to get My IVA removed from My Credit File?
You typically do not have to do anything manually when it comes to your credit file.
Your IVA should automatically be added, removed or marked as “complete” depending on what the status of it is.
However, you should definitely keep a close eye on your credit file to ensure there aren’t any mistakes and the entries within it reflect what your financial circumstances actually are.
If you notice any discrepancy such as the mention of an IVA within your credit file after six years have passed, then you can write to credit reference agencies and ask them to fix it.
Please note that you may have to provide evidence for your claim such as a letter from your insolvency practitioner.
Getting a Note Added
You can also ask credit references agencies to add a special note next to your IVA entry on your credit record which would explain why you had to take out an IVA such as due to a serious illness or accident, etc.
How do I Improve My Credit Score once My IVA Ends?
Once your IVA ends, the mention of it will remain in your credit record for another 12 months.
Since an IVA puts restrictions on how much credit you can obtain, you may not be able to do much to rebuild your credit score during these 12 months.
That being said, your IVA will definitely start to look less intimidating to lenders once it has been marked complete.
This is because lenders tend to look at your most recent financial history and information.
Rebuilding Your Credit Score
You can take steps to start rebuilding your rating such as by getting a credit-building credit card.
As the name suggests, these types of cards are designed for individuals looking to improve their credit scores.
Try and use this card for your essential daily expenses such as fuel, groceries, utilities, etc.
Only buy as much as you can afford and be sure to pay the outstanding balance in full at the end of each month.
As you start paying your outstanding balance in full every month, your credit score will gradually start to improve.
Is it a Good Idea to Get a Loan from a Specialised Lender Just After Getting out of an IVA?
I would highly advise against this unless you need the money for some sort of emergency.
As I mentioned earlier, your credit score will be quite low during the year after your IVA ends.
During this time, if you need to take out a loan, you’re going to have trouble being approved by traditional lenders.
You may have to turn towards bad-credit lenders.
These types of lenders specialise in providing loans to people with bad credit scores.
You must make sure to be aware of the pitfalls that they have. For example, most bad-credit lenders tend to charge much higher rates of interest compared to traditional lenders.
This means that you may end up paying back a lot more than the original loan amount.
Make sure that you are aware of any hidden charges they may have as well as any other information you may need.
It’s never a good idea to take out such a loan for luxury purchases. For a luxury purchase, it’s a much better idea to take a few months to rebuild your credit score and then apply to a traditional lender.
Only apply to a bad-credit lender in cases of emergency.
Beware of Loan Sharks
Another important thing to ensure is that you’re not dealing with a loan shark. Loan sharks are individuals or organisations that operate illegally and try to take advantage of people with bad credit scores who can’t get approved for traditional loans.
Be sure to ask them all the important information which ensures that they are indeed operating legally.
A good way of ensuring this is to check whether or not they are authorised and regulated by the Financial Conduct Authority.
Lenders who are authorised and regulated by the Financial Conduct Authority must follow their guidelines which ensure that you, the debtor, is treated fairly throughout the lending process.
You can also report them to the FCA if you feel you’re being treated in an unfair manner.
If you’re having trouble finding a lender, you can opt to contact a debt charity such as StepChange. They may provide you with information about specialised lenders in your area or they may even make you aware of other options you could consider.
In the end, I just have to say while an IVA definitely takes a toll on your credit score, it’s worth it for getting rid of your debts.
Also, with the right approach and method, you can rebuild and improve your credit score back to where it was in no time.
I hope you found this information useful. Let me know if you have any further questions.