How Will A Personal Insolvency Arrangement Affect My Credit Rating?
It’s understandable if you’re worrying about just what a PIA could do to your credit rating. After all, it’s taken you many years to build it up and you may be thinking of a time in the future when you want to re-mortgage and move house or start a business. Could a PIA jeopardise all of that?
The trouble is, if you’re worrying to the point where you haven’t taken action to tackle your debt and your creditors will, then you need help and you need it quickly. The first step is understanding credit ratings – what they mean, why they’re needed and how you can protect them as much as possible while getting out from under the burden of your debts.
Credit ratings are essentially a five year record of the transactions you make where you have been given a product or service and trusted to pay for it at a later date. You might have formal agreement like a loan or a mortgage, where specific amounts are to be paid at a specific time, or you might have a more informal agreement, like agreeing to pay your gas bill when it falls due. There’s no specific payment amount and no specific time it should be paid, but your utility provider is giving you the gas to power your home in expectation that you will pay in full when it asks for it.
Lenders want to make sure that you will pay for anything they ‘lend’ you, otherwise they could lose a considerable amount of money. The only way they can do this is to assess each person that comes to them for credit by examining a record of the credit transactions they have made in the past.
What they’re looking for can be broadly categorised into ‘definitely had problems’, such as personal insolvency (e.g. bankruptcy) or persistent arrears, and ‘may be having problems’ such as direct debits being refused, credit cards maxed out or even very high interest rates on credit cards, which may be an indication someone is having problems with a creditor.
The presence or absence of these indicators carry a number of points that collectively make up your credit score or rating. However it isn’t a simple matter of adding it all up and whether you are above or below the line means a yes or a no on a lending decision. Many lenders have their own criteria for what they want in a debtor, which is usually someone who will pay on time every month and give them a nice amount of interest by carrying a balance. What they don’t want is a) someone who will default on their payments – or even looks as if they might – as the possibility of not getting their money back worries them or b) someone who borrows little and pays everything back or even overpays as this reduces the amount of fees and interest they will earn considerably.
In Ireland it is the Irish Credit Bureau (ICB) that holds all the information about your credit history including:
Your personal information (name, date of birth and address)
Any loans you hold or have held in the previous five years along with the names of the lenders
The repayments you have made or missed
Any defaults on money owed
Any loan that you made a settlement on for less than you owed
Any legal actions taken against you
Unfortunately there is no way to avoid the negative impact that a PIA will have on your credit rating. It will be recorded on there for the duration of the PIA term (so six years) and for the five years after. However, this should not be a major consideration when deciding whether or not to take out a PIA.
The nature of a PIA means that you are only considered for one if you cannot make your payments when they fall due, and that is when you begin to default on your credit agreements with lenders. It is not possible to have a PIA and not see a clear run up to it on your credit record that would alert lenders to you financial problems. The odd default here and there suddenly becomes a regular thing every month. Your credit cards and overdraft will be at their maximum and you will incur fees for going over your credit limit or missing payment dates. You may even take out payday loans, which are a big red flag to a lender that you’re in trouble and that your debts have exceeded your income. You may find as the situation gets worse that no-one will lend to you any more. At that point your creditors will begin to step up their campaign of phone calls, letters and even court action to get their money back.
While having a PIA will undoubtedly impact heavily on your credit record, sometimes the nature of your situation may mean that your credit record is already tarnished and getting worse with each passing month. Any hopes you may have about getting another mortgage when moving house or starting a business with your current debt problems may be dashed the first time you try to set things in motion for them.
By tackling your debts with PIA, you get help from a Personal Insolvency Practitioner (PIP), your creditors will leave you alone and you will have enough money to live comfortably for the six years of the PIA. Once complete, you can then focus on rebuilding your credit history as quickly as possible and make plans for the time when you will once more be considered the ideal customer.
For more information about PIAs and credit ratings, call one of our experienced advisers now on 0800 193 1024.