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Tackling your debts

Will a debt solution affect my credit rating?

Posted 14 July 2016 by Christine Walsh

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A debt solution will affect your credit history, but not maintaining your contractual payments will as well. Learn more here.

If you’re looking into debt solutions at the moment, you’re probably wondering what effect this will have on your credit history. You might be asking yourself questions like, ‘how long will the effects last?’ and ‘will I ever be able to borrow again?’

If this is you, don’t worry. We’re here to explain how debt solutions work and their impact on your life, both positive and negative.  

A debt solution will affect your credit rating

A debt solution will negatively affect your credit history. However, it’s also important to remember that the alternative will be to simply miss the payments which is not a good idea. After a while, your lender may issue you with a default and this will have exactly the same negative effect on your credit history as any debt solution.

The reason for this is that a debt solution will involve either lowering or suspending your payments with your lenders, so you’re breaking the original agreement, which is why it will affect your credit history. They normally show on your credit file for six years from the date that they start, with the exception of a Debt Management Plan (DMP) in some cases. If you were to start a DMP before you actually missed any payments, it’s likely to be a number of months before your account actually defaults. 

But this doesn’t mean you should rule out looking at debt solutions. If you have unmanageable levels of debt, it may well be that a debt solution is the best way forward for you, regardless of any damage to your credit history. Let’s look into that in a bit more detail. 

Weigh up the pros and cons

When it comes to finding the right way to tackle your debts, it’s all about weighing up the pros and cons and looking at the whole picture. 

Take a Debt Management Plan (DMP), for example. This plan would allow you to reduce your payments on your unsecured debts to an affordable level for as long as it took to pay them off in full. 

This way, you won’t simply be missing the payments and getting into trouble with your lenders – you will have come to an arrangement that you’re both happy with. If you’re in a situation where you can’t afford your debts at their current level, it will be much better for you in the long run to put a realistic plan in place to deal with the issue.

At least with an appropriate debt solution for your needs you’ll be working towards clearing your debt, whereas if you don’t do anything, your debt will continue to grow.

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Will I be able to borrow again after a debt solution?

It will be possible for you to borrow after a debt solution, it just depends on the lender you apply to and how long after the solution you leave it before you apply. You may also find that you have to borrow at a more expensive rate of interest, at least initially until you’ve built up a good credit score again. 

Creditors look at two things when they’re deciding whether to lend to you or not – how well you’ve handled borrowing in the past, and their own criteria. The fact you’ve been on a debt solution could mean you find it harder to be approved in the future, or that you have to borrow at a more expensive rate of interest. But this doesn’t rule out borrowing in the future altogether. 

Is there any way to repair the damage?

Fortunately, you can start to improve your credit history once you’ve completed your debt solution. There are credit cards available designed to help people with a poor credit history improve it – by allowing them to borrow and repay small amounts to demonstrate they can manage credit responsibly. The point of these cards is to borrow so you can carefully pay everything back on time and in full. This will show that can successfully manage your borrowing since the debt solution. 

Your debt solution provider will let your creditors know that your solution has finished and the credit reference agencies will usually update your file to reflect this. The information itself actually belongs to the creditors though, so your solution provider wouldn’t be able to make them update your history. Once you’ve paid your debts off, you should get in touch with the three credit reference agencies – Experian, Callcredit and Equifax – to make sure that they know you’ve successfully completed your solution. 

It’s also important to make sure you’re registered to vote, and make sure you pay your bills on time. 

There are specialist mortgage brokers that might be able to help you identify which lender will approve your mortgage application. If buying your own house is a priority for you, it’s worth getting in touch with one of them to find out about getting a mortgage once your debt solution is over. 

You can get more tips on getting back in control of credit with our blog on how a bad credit history could affect your life.

Are all debt solutions the same?

Not all debt solutions are the same. Even though all debt solutions will have an effect on your credit history, there are some key differences between them. Each one can help in a different type of situation, and will have different pros and cons. 

The very best way to find out which debt solution is best for you is to seek professional advice. You can get free, impartial advice from the Money Advice Service or a debt charity. And our advisors are trained experts, who know exactly what to look for when recommending a solution. 

On our debt solution page, you will see the full range of solutions that might be available to you, and you can also take our Money Smart Report. The report is a really helpful tool which allows you to see exactly where you stand with your money month to month, and provides some ideas in terms of which debt solutions you can consider. 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.