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When your debt solution is over, how do you get your finances back on track?
Getting back in control of your finances with a debt solution can feel like a weight’s been lifted off your shoulders. It means no more having to constantly keep up with payments you can’t afford to pay and your lenders won’t usually call you anymore.
But debt solutions can also have some negative effects on your life – and one of the main downsides is how it will affect your credit history. The damage to your credit history means you’ll struggle to get credit and some other services, even after your debt solution has ended. Let’s take a look at what a debt solution will mean for your credit history and how you can start to borrow again after debt.
Debt solutions and credit history
When you’re on a formal debt solution like bankruptcy or an IVA, this will show on your credit history for at least six years from the start of the solution. That means if anyone runs a credit search on you during this time with Experian, Equifax or CallCredit, they’ll be able to see your debt solution. You won’t take out credit during a debt solution but other people might credit check you if you apply for certain services – like if you’re taking out a tenancy agreement or a mobile phone contract.
If you’re on a Debt Management Plan (DMP), this is an informal solution so it won’t appear on your credit history in the same way. The reason for this is that as a DMP is an informal solution, it doesn’t appear on any public register like formal debt solutions do. This means that there’s no centralised database that credit reference agencies can use to update their records on DMPs. But this doesn’t mean that having a DMP will have no effect on your credit history.
With a DMP, you’ll make one reduced payment into your plan every month and your creditors will get a pro rata share of this – so the more you owe to each creditor, the bigger share of your payment they will get. This means that each creditor will get less each month than you said you would pay in your original credit agreement. Even though under a DMP they will eventually get the whole debt amount back, it’s possible that they’ll default your account as you’re making reduced payments. These defaults will also appear on your credit history for at least six years.
Life after debt
Once your debt solution has ended, it will still show on your credit history for at least six years from the date it first started if it’s a formal solution, and the same goes for your defaults. So if you apply for credit or some other services like a mobile phone contract or a rental agreement, creditors will be able to see these on your history when they run a credit search on you.
If you’ve got a history of struggling with credit such as a debt solution, it’s possible that some lenders will reject you as soon as they see this on your file. This is because they see you as an unreliable borrower and might think that you’d be less likely to repay what you’re borrowing this time. Even if they don’t reject you, it’s possible that some lenders will accept you at a higher rate of interest – meaning borrowing could work out more expensive.
Steps you can take
But a damaged credit history doesn’t last forever – you can take some steps to improve it. It’s not going to suddenly get better overnight, and it will take some time before you start to see an improvement.
The first thing you should do when you’re trying to improve your credit history is make sure you’re on the electoral register by registering to vote. This doesn’t mean you actually have to vote – it’s just what lenders use when they’re running their fraud checks and trying to verify your address. You should also make sure you update this if your name changes – if you get married, for example. It’s also important to make sure that you keep your address up to date on any financial products you hold and on official documents like your passport and driving licence.
You should also make sure you’re applying for the right credit products for you. For example, some credit cards are designed specifically for people with bad credit histories so you might be more likely to get these. Keep in mind that they’ll typically attract a higher rate of interest though so you should only use them for borrowing when you’re sure you can afford to pay back the whole amount in the month. That way, you won’t have to pay any costly interest. If you use the card to make occasional purchases and then make your repayments on time, you’ll gradually start to rebuild your credit history.
If you do make a credit application and get rejected, take some time before you put in another application. Don’t be attempted to apply for a different loan or credit card right away as each time you apply it appears on your credit history. If you make a lot of applications for credit in a short space of time, it can make you seem ‘desperate’ for credit, which could make it harder to get accepted.
It’s normal to feel apprehensive about borrowing after you’ve had debt problems. After all, you don’t want to end up taking on more credit than you can afford to repay. If at all possible, try to use some of the money that you were putting towards your debt solution to build up a savings pot – which should help reduce the need to borrow in future.
by Emily BancroftBack to blog home