How Does Insolvency Affect Credit Ratings?

Few would argue that credit scores are important. If you need to make a vital purchase, or require additional funding, this figure will be examined by lenders to get an idea of your financial history.

Considering this decision could greatly improve your lifestyle, it’s no surprise that so many choices are made depending on whether something will affect a credit score. In fact, one of the most common concerns we hear from our customers is about how insolvency could affect credit ratings.

In the short-term, a solution such as an IVA will usually have a detrimental effect on your credit score. It’s worth viewing insolvency as an investment though – in the long term, it should be quite beneficial.

What is a credit rating?

A credit rating is a figure assigned to every one of us. Broadly, it details to lenders how likely we are to miss payments or default on accounts. There are a few credit reference agencies in the UK but they all use different scoring metrics. Equifax, for example, scores between 0 and 700. In their case, anything over 420 is regarded as ‘good’.

The higher the score, the more likely you will be to have loans and other financial products approved.

What’s your credit score at the moment?

Chances are, as you’re reading this page, your credit score might not be great. If you’re struggling to repay lenders, missing payments, and have creditors chasing you for money, your recent financial history is probably having a determinantal effect on your rating.

Although insolvency will – in the short term – likely harm your credit rating, it’s worth bearing in mind if your score would have improved otherwise. After all, if you don’t think you’ll every repay what you owe in a reasonable time, then your credit rating won’t improve any time soon.

How will insolvency affect your credit score?

If you take out a form of insolvency such as an IVA, this arrangement will be detailed on your credit report. Although it indicates to lenders you’ve had problems repaying debts, your credit history would have probably demonstrated this anyway. Furthermore, it shows you’re trying to repay what you owe.

When the IVA is active, you will find it almost impossible to access additional credit. Furthermore, you’ll need to seek permission if you want to take out financing worth more than £500.

When the IVA has ended though, that’s a different story.

What happens after the IVA has ended?

The IVA should be removed from your credit report around six years from the date it came into effect. Considering this arrangement lasts for between five and six years, it should – therefore – be taken off just after it ends.

Once done, you’ve effectively got a clean slate where you can start rebuilding your credit history. It’s worth noting this will take time though. Still, by maintaining good financial practices, you should be in a great position to improve your credit rating.

Let us help

Insolvency is a big decision and, understandably, you probably have a lot of questions about it. Fortunately, we’re here to help you determine if it’s right for you. Debt is an extremely personal matter but we promise not to judge, criticise, or condescend.

We’ll provide you with the best debt advice we can and will – ultimately – be able to determine if insolvency is not only the best outcome for you – but also for your credit rating.

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