Your IVA is one thing. But what happens afterwards?
Completing an Individual Voluntary Arrangement (IVA) is a big achievement. It’s also a clean slate, a chance to start again with your finances free from interest rates, late payment notices, threatening letters and everything else that accompanies falling into debt.
Something else that effectively starts again once you’ve completed your IVA is your credit rating. In this guide, we’ll explore how an IVA affects your rating, and look at ways of rebuilding your rating once the IVA is complete.
Do IVAs really help people out of debt?
Yes. As latest government figures show, around two-thirds of the people who began IVAs in 2010 and 2011 had completed them by 2017. They don’t help everyone. Some IVAs are terminated because of a failure to keep to the terms of the IVA. A relatively small number are extended beyond the usual five or six years. But for most people, starting an IVA now means being debt-free within five to six years.
How will an IVA affect my credit rating?
An IVA will appear on your credit rating for six years, starting from the date it is approved. Even if your IVA is completed in less time it will remain on your record for six years, although it will be marked as ‘complete’.
Why does my credit rating matter?
We need credit for all sorts of buying decisions. From renting a new flat to leasing a car, applying for a credit card or buying a new TV on an interest free deal, all of them will involve a credit check. A credit check is where the seller, agent or landlord checks your financial history via a credit reference agency. The credit reference agency lets them know if they can be confident in your ability to keep making payments, or whether there’s something they should be concerned about.
In the UK there are four credit reference agencies. Whilst you may come across other credit reference brands they’ll all be subsidiaries of, or use data from, these four:
As long as an IVA sits on your credit file it will negatively affect your credit rating. That doesn’t necessarily mean you won’t be able to get any credit, but you’ll have far fewer options and borrowing money will cost you more.
Why should I rebuild my credit rating?
After getting into problems with debt and then spending years escaping it again with an IVA, you might think that taking out more debt is the last thing you’d want to do. But it’s important to remember that, as Barclays notes, “Debt doesn’t have to be bad – it’s all about how you manage it.”
Credit can be an essential way of getting by and paying for life’s essentials. It can also help you respond to change much more easily, so if you need to move home, upsize, downsize, change your car etc, you can. And the better your credit rating, the easier and cheaper it will be to borrow.
Where do I start rebuilding my credit rating?
To begin with, get a copy of your credit report so you can see your credit score and any credit accounts showing against your name. Each of the above reference agencies will give you at least some of that information for free.
The scoring systems vary from agency to agency, but after an IVA you should expect your score to be poor. That’s ok – over the next few years, you can set about improving it. And as the agencies look at your credit over a rolling period of six years, every positive month pushes negative information further down your record until it eventually disappears altogether.
Your credit report may also show you credit companies that would be likely to accept you. After an IVA, the rule of thumb is only take small amounts of credits you know you can easily pay back.
What factors affect my credit rating?
Each credit reference agency weights the following slightly differently, but all of them will look at this information to decide whether to up your credit score:
Payment history: This is the single most important factor and one which, immediately after an IVA, will be most damaging to your rating. But every payment that you meet will gradually help you improve your score. Completing a credit agreement is another tick in the box, which is why occasional, small and short term use of credit can really make a difference in the months and years after an IVA.
Recent history: Taking out several credit applications in a short period of time, or making several credit checks, will lower your credit score. Try to time your purchases so that you don’t need lots of credit all at once. If you’re just looking at your options, make sure you only use sites and services that offer a ‘soft search’ – that is, sites that won’t affect your credit rating.
Length of credit
It takes time to build a good credit history. Having a long record of meeting your repayments matters, and whilst an IVA will effectively press reset on your credit record, the sooner you are able to start rebuilding that history, the better.
Use of available credit: Every credit and store card sets a credit limit. After an IVA, the credit limit you are given will be low but over time this should increase. Keep the amount of credit at 30%-50% (or less) of the total limit to give your ranking a boost.
Credit mix: Too much credit of the same type will be a problem. Four store cards may adversely affect your score, whilst four different types of credit, for example a student loan, a mortgage, a credit card and a car loan is likely to be a positive factor, providing you are managing to meet all you monthly payments and keep balances down.
How to keep building your credit rating
Once you’ve been accepted for credit again, stick to these rules to ensure your debt doesn’t build and your rating doesn’t slip:
- Always meet your repayments
- Keep balances 30%-50% below total available credit limits
- If you can, pay off your credit card balance in full each month. That’s especially important in the period after completing an IVA as the interest you’ll pay on any outstanding balance will be high
- Always stay within your agreed credit limits
- Even if you have an agreed overdraft, aim not to us it as interest rates can be high
- Only maintain low, easily affordable amounts of credit at any one time
Escape debt for good
An IVA is the UK’s favourite way of managing debt problems but it’s not available in Scotland. Here, a protected trust deed is the equivalent to an IVA, although there are some differences between the two. Once complete, however, the route to improving your credit rating is exactly the same.
Are IVA’s a government backed scheme?
IVA’s were introduced in 1986 and form part of the Insolvency Act (1986) to help people who are struggling to pay their debts. Unlike debt management, they are a legislated and formal debt solution meaning that the IVA agreement is legally binding, which can help to eliminate harassment from creditors.
Will I lose my home in an IVA?
Unlike bankruptcy, you wouldn’t usually lose your home in an IVA. If you own your home and have equity you may be required to release it so the IVA company can pay your creditors (that is, the people and organisations to whom you owe money). Read more here.
Will an IVA affect my credit rating?
Your credit rating will be affected whilst on an IVA and will stay on your credit file for up to 6 years. Any debt solution will affect your credit rating, but at the same time if you’ve missed payments and defaulted then your credit file will be affected anyway, as a default also stays on your file for up to 6 years. Read more here.
Do I need to know who I owe before I apply for an IVA?
It’s not a problem if you cannot remember all the people you owe money to before you apply for an IVA. A lot of people forget as they may have been taken out a long time ago. We have systems which can find all your debtors.
How much debt can I write off with an IVA?
The amount of debt that can be written off with an IVA very much depends on personal circumstances, such as your current employment status, debt level and disposable income. The maximum is 90% of unsecured debt but the average is around 60%.
How can I apply for an IVA?
There are 4 ways to apply for an IVA. 1: Call us on 0800 193 1024. 2: Apply online here. 3: Chat with us on live chat. 4: Apply through our Facebook page. The IVA application process is very simple and can be setup in as little as 24 hours. The speed usually depends on how quickly you can get information to us.
I’m thinking about an IVA. But what happens if I have no money spare at the end of the month?
It’s still worth exploring options with a debt management professional. They may be able to help you make your budget stretch further. If not, they will be able to give you advice about which is the right debt solution tool for you. That could be an IVA (in England, Wales or NI) or a protected trust deed (in Scotland) but there are several other potential options.
What happens if my circumstances change?
Talk to your IVA insolvency practitioner. They may be able to get agreement from creditors to a temporary reduction in payments or a longer repayment period to help you over a difficult period.
Why is my bank taking money from my account to pay my debts?
Banks hold an automatic ‘right to offset’. This means that if you have money in a bank account and unpaid loans or credit cards with the same lender, they can take the money in the account to pay off the debts. More confusingly, this can also happen when the debt is owed to a company also owned by your bank.
So, for example, if your bank account is with HSBC and you have an unpaid credit card with M&S Bank or First Direct, a right to offset could be used to pay those debts, because HSBC owns all of them.
You can find more about which banks are subsidiaries of other banks here.
In an IVA, and to avoid the right to offset, you may be required to switch bank accounts.
Will an IVA affect my credit rating?
Yes. The record of the IVA will remain on your credit file for six years from the date the IVA begins.
Will I still be able to get credit with an IVA?
Getting credit is harder with an IVA. If you want more than £500 of credit you’ll need permission from your insolvency practitioner in most circumstances. The chances of credit being approved are less, and any credit you are able to secure is likely to cost more.
Bear in mind, however, that an IVA (and a Scottish trust deed) is designed to help you escape debt, not find new sources of it.
If I choose an IVA, do I have to deal with my creditors directly?
No. In fact, you can’t set up an IVA without an insolvency practitioner who will handle all the to-ing and fro-ing between creditors. Assuming you qualify in other ways (see above) that makes an IVA ideal if you’d rather not speak to your creditors.
To explore your debt management options so you can create a new and improved credit history, talk to us now.
- Apply For An IVA
- Is An IVA Worth It?
- Are IVAs a Government Scheme?
- What If I Can’t Pay My IVA?
- Can I Get An IVA If I’m Self Employed?
- Rebuilding My Credit Rating After An IVA
- IVAs: What Will I Need To Show My Insolvency Practitioner?
- Who’s Most Likely to Need an IVA?
- How Much Does An IVA Cost?
- Can I Afford An IVA?
- IVAs – Can I Lose My Home?
- IVA And Trust Deeds | Whats The Difference?
- How Will My IVA Affect My Parents?
- An IVA Mythbuster
- Can An IVA Be Rejected?
Trust Deed Example
Example Unsecured Debts
|2||Credit card 1||£6,812|
Your Monthly Repayments Would Be
a Scottish Trust Deed £748
(total contractual repayments)
a Scottish Trust Deed £295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances. For more information on our fees click here