Will an IVA Affect My Credit Rating?

Updated: March 21, 2024 Author:

Quick Answer: An IVA will negatively affect credit ratings reported by all 3 of the UK’s Credit Reference Agencies (CRAs). An IVA is a type of Insolvency and will be included on the Individual Insolvency Register used by each CRA.

    How IVAs are Reported on Credit Files

    All three of the UK’s Credit Reference Agencies obtain data from public databases. One of those that has a significant impact on your credit rating is the data entered into the Individual Insolvency Register. This is a database containing information on those who are affected by Bankruptcy, Debt Relief Orders, Individual Voluntary Arrangements (including Fast-Track Voluntary Arrangements – FTVAs), Bankruptcy Restriction Orders or Undertakings (BROs/BRUs) including interim bankruptcy restrictions orders (iBROs)

    How Long Will an IVA Be Visible on Credit Reports

    All information on credit reports drops off after six years. In the case of IVAs, the six-year countdown starts on the date of the IVA approval. Not when a default was first reported on your credit files. In practice, this means you could have defaults reported on your credit report from 5 years previous that are subsequently rolled into an IVA, which then continues to lower your credit rating for five to six years after the IVA approval date. It’s for that reason that you should consider all of your debts being reported across each of the Credit Reference Agencies.

    Keep in mind that not all debts are reported to CRAs. There can be instances, such as using local contractors who may take legal action through the Small Claims Courts to recover unpaid fees up to £10,000. Small business contractors don’t report to Credit Reference Agencies, but if you lose a claim against you in court for non-payment, and fail to pay within the stipulated time frame, the County Court Judgment issued against you becomes public information and will be put on your credit report, further impeding your credit rating.

    The Duration of an IVA’s Impact on Your Credit Rating

    The typical length of an IVA lasts for 5 years if you have home equity that can be released to repay a lump sum at the end of the IVA. In the case of a mortgage held in joint names and your partner does not agree to the release of equity to repay creditors included on your IVA, it can be extended to 6 years. That duration can be increased, if, for example, you fail to make some repayments, take a payment holiday, or alter the terms of the IVA perhaps due to a change of circumstances during it.

    Failing to keep up IVA payments can lead to bankruptcy, but in the case of a failed IVA, you can contact each of your creditors to make individual repayment arrangements to prevent them from taking legal action against you. Failing that, your Insolvency Practitioner can begin legal proceedings to make you bankrupt. If you are declared bankrupt, the bankruptcy filing on your credit report begins from the date that starts. That can mean another six years of dealing with a poor or bad credit score.

    After an IVA is Completed…

    Once your IVA is completed, you’ll be issued with a completion certificate. This is your proof that you’ve met the terms of the IVA and successfully repaid all amounts included in the agreement. It takes up to 3 months for your details to be removed from the Individual Insolvency Register. After three months pass, check your credit reports with each of the UKs main credit scoring companies to ensure your IVA has been updated on your credit reports. If it is still being reported, you can contact each of them and provide them with a copy of your completion certificate so they can update their records.

    The Longer-Term Effects of an IVA on Your Credit Ratings

    While an IVA is active, you can’t take out any type of credit exceeding £500 without the approval of the supervising Insolvency Practitioner (IP). The result of that has longer lasting impacts on your credit rating because after the IVA ends, you will have a thin credit file. The IVA, if repaid earlier than 6 years, will remain on file for 6 years from the date it is processed. It’s unlikely that you’ll have additional reporting of secured loan repayments, credit card repayments, or any payments being reported for items bought with a consumer credit agreement.

    Will an IVA affect my Partner?

    An IVA is by definition an “Individual Voluntary Arrangement” and will not affect partners, spouses, or anyone in the same household. There is an exception to that which would involve taking out an interlocking IVA. These are the equivalent of a joint IVA, in which case, a financial association is created. These are only beneficial in the case of joint credit agreements where both people are struggling to repay the debt. When this is the case, both people can combine the debts into an interlocking IVA, in which case, it will affect a partner’s credit ratings, and put borrowing restrictions on both people named on the IVA.

    Strategies for Rebuilding Your Credit Rating Post-IVA

    Given the lack of credit reporting during an IVA, lenders searching your credit reports will have little to assess due to the adverse credit history and lack of reporting. Building credit means getting approved for finance and then building a track record of on-time repayments. Several types of credit accounts are suitable for building your credit history.

    Credit builder card

    A credit builder credit card is designed for individuals with poor or no credit history. It has a low credit limit and a high interest rate. The purpose is to encourage spending small and paying the balance off in full monthly. Payments get reported to at least one of the Credit Reference Agencies, helping to raise your credit score.

    Small loans with affordable monthly repayments

    Small loans are the same as unsecured loans, requiring no security, although, with a poor credit rating, it is likely that you’d need to apply with a guarantor or co-signer (known as guarantor loans) The sooner these are repaid the better it looks on your credit report, so keep amounts small so that the repayments are the most affordable. Until you raise your credit score, interest rates will be higher. The more settled accounts you have, the more confidence lenders viewing your credit file in the future will have in your ability (and willingness) to repay in full.

    Have utility bills in your name (or the person who needs to build their credit score)

    Have your water, electricity, gas, and broadband contracts in the name of the person needing to boost their credit profile. That’s because utility bills can affect your credit score. Most utility companies provide updates to Credit Reference Agencies. Take advantage of it and use their reporting for your benefit.

    Get on the Electoral roll

    Each year, your local Electoral Office runs a canvas asking for updates on everyone living at an address. Make sure that the information is reported, and that it is accurate because the electoral roll helps your credit score.

    Catalogues with credit accounts or low-cost rental agreements

    A significant number of UK catalogues provide credit accounts. Rather than pay it upfront, after a credit check and a credit limit being set upon approval, you can shop at each store you have a credit account with, buy items, add them to your account as credit, then make repayments in installments until it’s repaid. Most companies offering a credit account will update your payment history and credit limit to at least one of the CRAs. Read the Terms and Conditions for each company to see which CRA they use, and if they continue to update your credit report to show balances settled. The same happens with rental companies.

    Overdrafts

    Current accounts have two types of overdrafts. Arranged and unarranged overdrafts. An arranged overdraft is the type that’s good for your credit report, provided you manage it responsibly.

    Credit cards

    Credit cards are the hardest to be approved for, however, with a mix of the above credit accounts, once they are reported as having payments made on time for 6 to 12 months and longer, you’ll notice your credit score increase gradually. As with everything, there’s good and bad of credit cards and they are not for everyone. If you struggle to stick within a budget and don’t trust yourself to impulse spend, it’s probably a good idea NOT to get a credit card so as to avoid the temptation of getting into bad debt.

    One important thing to remember is that every type of credit account you apply for leaves a footprint on your credit report. Whether it’s approved or rejected. Aim to keep applications to a minimum of one per quarter, or better is to leave 6 months between applications, meaning if you open a catalogue credit account, don’t apply for an overdraft until three or six months have passed. What you don’t want is for a lender to see a new credit account has been opened and within two months, you’re applying for an overdraft. Looking at your files could give the impression that the overdraft is needed to keep up repayments on the new credit account.