Using an individual voluntary arrangement to solve your debt problem will affect your credit rating. However the effects could disappear faster than if you use debt management.
An individual voluntary arrangement (IVA) is an agreement with creditors to settle personal debt. Monthly repayments are reduced to a single affordable amount and paid for 5 years. At the end of the agreement, any outstanding debt is written off.
The IVA process offers substantial advantages such as the fact that it enables you to write off a considerable amount of your debt. However one of the downsides is that your credit rating is affected.
A record of the IVA is placed on your credit file. This will normally prevent you from taking unsecured credit such as a personal loan or bank overdraft.
The IVA will also make it more difficult to take a mortgage. It will not prevent a mortgage being taken out all together, however it will be necessary go to a lender who will accept borrowers with a history of credit problems. This in turn will result in a more expensive mortgage.
The effect on a credit rating needs to be put in context
The fact that a credit rating is damaged is often one of the things which puts people off taking up an IVA. However, the way that the credit rating is affected needs to be put in context with other debt management solutions.
Many individuals use debt management plans to resolve their debt problems. These plans will have a similar effect on a credit rating as an IVA. Each creditor will normally register a default against you which will be recorded on your credit file.
The effect of these defaults will be very similar to that of an IVA. They will normally prevent you from taking unsecured credit and a mortgage will only be available from adverse lenders. However, unlike an IVA, these negative effects will continue until your debts are repaid in full.
An IVA will remain on your credit file for six years from the date that it is started. This means that after six years, your credit rating will be clear. However, it is not unusual for a debt management plan to last for ten years or more.
The effects of a debt management plan will last longer
If you decide to use a debt management plan to resolve your debt problem, it is likely that your credit file will be affected in the same way as if you had undertaken an IVA. However, because a debt management plan will normally last for longer than 5 years, your credit rating will be damaged for longer if you go down this route.
Clearly, if you carry out an individual voluntary arrangement, your credit rating will be negatively affected. However it is important to remember that this will not last forever.
Unlike a debt management plan which could last for much longer, after five years it is likely that your IVA will be finished. A year later the record of it will be taken off your file. As such, borrowing after an IVA is completed will certainly be possible and generally far more quickly than if you had undertaken a debt management plan.