How Does Insolvency Affect Credit Ratings?

As you get older, it seems your credit rating becomes more important. From securing loans to getting your first house, this number can dictate whether your dreams come true – or if you won’t get the funding you need.

Understandably, therefore, its common to make choices depending on whether something would adversely affect your credit rating. In the short term, insolvency will probably have a detrimental effect on your score. In the longer term though, this option could leave you in a much better position to get the funds you need.

What are credit ratings?

Credit ratings are numbers assigned to every one of us. When we apply for a financial product, lenders will check this score to largely determine the likelihood of us defaulting. In essence, figuring out how much of a ‘risk’ we represent.

There are several credit reference agencies out there – each with their scoring systems. Equifax, for example, scores people out of zero to 700. In this situation, anything over 420 is regarded as ‘good’ whereas scores below 379 are marked as ‘poor’.

Generally speaking, the better your credit rating is, the more likely you will be to secure financial help.

Is your credit rating bad now?

Chances are, if you’re considering insolvency, your credit rating isn’t healthy. After all, holding substantial debts, missing payments, and having these lenders chasing you for money, should all have negative effects on your score.

Although insolvency will likely have a detrimental impact on your rating in the short term, it’s worth considering if whether it would have improved given your current position. If there is no way you can see to repay what you owe in a reasonable timeframe, your credit score would have probably stayed ‘bad’ for the foreseeable future.

The effect of insolvency on credit ratings

To illustrate how this works, we’ll use an IVA – a form of insolvency – as an example. When you take out this solution, it will be recorded on your credit report. This signifies to lenders that you’ve had problems repaying other creditors in the past; which will probably make them less inclined to approve financial products.

However, it also demonstrates you’re taking responsibility to repay your debts – something which would likely not be apparent otherwise.

While the IVA is active, you will find it difficult to obtain additional lines of credit. In fact, you will need permission if you want to borrow more than £500.

What happens after insolvency?

Details of the IVA should be removed from your credit report six years after it was initially activated. Once that’s done, your debts will be resolved and you’ll effectively have a clean slate to begin rebuilding your score. However, this will take time.

Your credit report will probably be left in a poor state and, to begin with, you’ll likely find it difficult to obtain financial products. Eventually though, with responsible money management, you’ll be in a better position to rebuild your credit history.

Insolvency, when it comes to credit ratings, should be viewed similar to an investment. To begin with, it will likely damage your score. However, it can ultimately leave you in a better position – more so than while struggling to repay your lenders.

We can help

Insolvency is a big decision but you don’t have to make it alone. Get in touch today and we can help determine whether this choice would benefit you. We promise not to use complicated jargon and we’ll use our experienced knowledge to identify whether insolvency would be good for you and your credit rating.

If not, or if another debt solution would be better, we’ll tell you about it.

Get in touch and let’s put you in control of your finances today.