Dealing with debt can be stressful, but there are several solutions that may help you manage it. One option you may have heard of is an IVA (Individual Voluntary Arrangement). But what exactly is it?
In this blog, we'll explain what it is, how it affects your credit score, and the steps you can take to improve your financial situation once it's over.
IVAs explained
An IVA is a formal agreement between you and your creditors to repay your debts over a set time period. It can be useful for people with multiple debts, as it combines them into one manageable payment. This may make it easier to get control of your finances.
However, it’s important to know that it can have major impacts on your credit score, which may affect your ability to get other types of finance in the future. Because of this, it should be carefully considered before making a decision.
How does an IVA work?
You make regular payments to an insolvency practitioner, who then divides the payments among your creditors. During this time, your creditors should not:
- Charge you interest on your debts.
- Contact you to demand payment for your debts.
Key points to know about IVAs:
- Legally binding: You must stick to the agreed terms and make the payments.
- Income increases: If your income increases, you should make your IVA provider aware.
While it can be a useful debt management option, it is a serious commitment. So, it’s important to fully understand the impact it can have before deciding to enter into one.
How long does an IVA last?
Typically, they last between five and six years, so it is a long-term commitment. However, the length may vary depending on your circumstances, and some people may be able to complete it early with a lump sum payment.
How does an IVA affect your credit score?
Entering into an IVA can seriously impact your credit score, as it shows lenders you're having financial trouble. This can cause your credit rating to drop significantly. Usually, it stays on your credit report for six years, even if it’s completed sooner.
Additionally, it can make getting new credit tough. So, it may be harder to get other loans, credit cards, or even a mortgage.
Here's how it can affect you:
- Creditworthiness: It can become harder to attract lenders.
- Credit approval: New credit applications might be denied.
- Interest rates: If approved, loans may have higher interest rates.
Rebuilding your credit score after an IVA
Once your IVA is complete, it's important to work on rebuilding your credit score. Showing that you can manage your finances responsibly is key to improving your credit score. Start by ensuring that all IVA-related information is updated correctly on your credit report.
Here are some other steps to help you rebuild your credit score:
- Pay bills on time: Make sure to pay your bills on time, as consistent payments will gradually boost your score.
- Keep your credit usage low: Also, you should to try keep your credit usage low, ideally under 30% of your available limit.
- Check your credit report: Regularly checking your credit report is important, so you can spot and correct any mistakes.
Summary
IVAs are a debt solution that can help you repay debts over 5-6 years. While they may offer some relief, they are legally binding and can negatively impact your credit score. Before getting one, it’s important to carefully consider if it’s the right option for you and explore any alternatives that might be a better fit.
If you're struggling with debt, reach out to your lender as soon as possible to discuss your options. You can do this directly or with the help of a debt charity. For free advice, contact MoneyHelper or Citizens Advice Bureau (CAB).
