Can you pass a credit check with an IVA?

Entering into an IVA can seriously impact your finances both during and after you complete your arrangement.

If you want to borrow money or apply for a mortgage whilst you are in an IVA, lenders may also perform a credit check which can reveal evidence of your unpaid debts and make it difficult for you to be approved.

But is it possible to pass a credit check with an IVA? In this guide, we’ll explain what an IVA is, what a credit check is, how an IVA will affect your credit and whether you can rent a property with an IVA.

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What is an IVA?

In England, Wales and Northern Ireland, an IVA (Individual Voluntary Arrangement) is a legally binding debt solution that is set up and managed by a Licensed Insolvency Practitioner to help you consolidate your unsecured debts into an affordable monthly payment. In Scotland, an IVA is known as a Trust Deed.

It is a legal agreement between you and your creditors (the people you owe money to) to repay a portion of your unsecured debt under the proposed terms in exchange for the remaining balance being written off.

Most arrangements last between five and six years and there is no minimum or maximum limit on the amount of debt that can be included in an IVA as long as you can make the payments as agreed upon with your creditors.

What is a credit check?

A credit check, or a credit search, is when a lender looks into your credit history to determine how well you have managed your finances in the past.

There are soft and hard credit checks and you must know the difference if you are planning to apply for credit with an IVA.

A soft credit check is when you check your own credit report or when a lender performs a top-level check on your financial history.

It is recorded but doesn’t leave a visible footprint on your credit file and, therefore, doesn’t affect your credit rating.

A hard credit check, on the other hand, is a more in-depth check of your financial history and is usually carried out when a lender wants to see your track record of repaying money you have borrowed in the past.

Utility companies, landlords, letting agencies, phone companies and even potential employers can carry out a credit check to find out more about your finances.

The information is taken from the details held by the three main credit reference agencies in the UK (Experian, Equifax and TransUnion) and this information is usually enough to paint an accurate picture of your complete credit history and financial affairs.

What does a credit check show?

A credit check can reveal a number of things about you and your finances including:

• Name and date of birth
• Current and past addresses
• Electoral status
• Current overdrafts
• Current credit accounts (credit cards, mortgages, payday loans etc.)
• Public records (County Court Judgments, IVAs etc.)
• Fraud or identity theft

How will an IVA affect my credit?

Whilst an IVA can help you repay your debts in a way that you can comfortably afford, it can have a negative impact on your credit for a number of years.

For example, evidence of an IVA will appear on your credit reference file (also known as a credit record or credit report) for a total of six years from the date it was granted – even if you complete your arrangement within the standard five-year period.

During this time, your credit rating, or credit score, will be lowered and you may find it difficult to get approved for further credit.

Why would a lender perform a credit check during an IVA?

There are several reasons why a lender may perform a credit check on your finances whilst you are in an IVA with the most common reason being if you were to apply for further credit before completing your arrangement.

However, it is worth noting that you can only obtain credit worth £500 or less during the duration of your IVA with failure to comply with this rule potentially resulting in your IVA failing.

If you need more credit during your IVA, your Licensed Insolvency Practitioner can provide expert debt advice and may be able to make changes to your payment plan or reduce your monthly payments through a payment break.

Can you pass a credit check with an IVA?

Whilst not impossible, it can be extremely difficult to pass a credit check with an active IVA.

Because an IVA signifies you have missed payments in the past, you are, in the eyes of a lender, at greater risk of defaulting on future payments.

Because of this, lenders may be hesitant to approve you for further credit.

This is why it is recommended to wait until you have completed your IVA before applying for credit.

Evidence of your IVA will always remain on your credit file for six years from the date it was granted but your chances of being approved are greater if you have successfully fulfilled the terms of your arrangement.

Can I rent a property with an IVA?

Another reason why a lender may check your credit during an IVA is if you were to apply to rent a property.

This may sound extreme but it is not unusual for landlords or letting agencies to perform a check of your credit history before agreeing to let you sign a tenancy agreement and move into the property.

This can create a problem if you are in an active IVA because some landlords or letting agencies are wary of people with past or current debts as this can cast doubts about your ability to pay rent in full or on time.

However, there is no rule against allowing tenants with an active IVA to rent a property and it is always up to the landlord or letting agent to make a final decision.

It is also worth remembering that, even if your application is approved, the landlord may ask you further questions or, in some cases, increase your security deposit for greater peace of mind.