Effects of a DMP and an IVA on your future purchases.
Posted on: Wednesday, November 30, 2011
by azasucha
Are you thinking about an IVA or a DMP? If you wonder how these debt solutions will affect your life and your financial situation in the long term, read this!
Effects of a DMP and an IVA on your future purchases.
We all think about our future, and once your current finances are sorted out, you may be thinking about the impact your current situation will have on your future finances.
Maybe you’re thinking of buying a house further down the line and are worried how a DMP or IVA will affect this. You may also be concerned that once your debts are sorted out you will need to use credit to cover any unforeseen goods at short notice, like a car or a washing machine. How will your IVA or DMP affect these instances?
Well, an IVA and a DMP will have an impact on your ability to obtain credit but for how long and why?
Lenders will use a credit scoring system and information obtained from the three main Credit Bureaux -Callcredit, Equifax and Experian - to assess if someone is a good or bad risk for credit.
Each credit reference agency has a DMP ‘flag’ which should be used to indicate where an account is involved in a debt management plan. Sometimes, however, the flag is not used, and the account is shown as being in default. As this is factually correct, the accounts can still show on someone’s credit file as being in default during a DMP and it may mean further credit is harder to obtain for the duration of the plan. If you wish to update your file, you can always write to the credit reference agencies and request a ‘correction’ to show there is a DMP in place. Once the debts have been settled this will be reflected in the credit files and improvement of the overall credit rating.
As your credit rating will likely show several defaults, it may not be easy to obtain further credit straight away. Your credit rating will need to be rebuilt, and lenders may see you as a high risk, which may mean higher than average interest rates.
An IVA will usually show on your credit file for a total of 6 years, from the date it is accepted by your creditors. This will typically mean it will only affect your use of credit for one year after the IVA has been successfully completed, if the IVA lasts for the usual five years. During the IVA, the credit reference agencies will show your accounts as being in default, which is technically correct. After the IVA is completed your credit file will be updated to show that it has been successfully completed.
After the 6 years have expired, your credit rating will revert back to the level it was when you were 18 i.e. a clean slate with no credit history. If you want to obtain further credit in the future this will mean building up your credit rating again from scratch, e.g. by taking out a store or credit card and paying off the balance in full each month. Some lenders may see a previous IVA as evidence of a higher risk and therefore reflect this with higher interest payments being requested. However, some may see an IVA as evidence of an ability to meet regular payments for 5 years. Each lender will have different criteria which you need to be mindful of.
If you wanted to apply for a mortgage or a remortgage during the term of an IVA, it may be more difficult due to the perceived increased risk for the mortgage lenders. It will again be down to individual lenders’ policies as to what they will accept, however lenders could choose to decline applications from someone in an IVA, or offer an alternative product, again potentially with a higher interest rate.
As the IVA will only show on your credit rating for 6 years, applications for a mortgage after this time may not necessarily be affected, although you may need to build up your credit history in order to benefit from a better rate and product.