Debt Relief Orders And Your Credit Rating

A Debt Relief Order or DRO can be a great way of dealing with your debts if you meet the strict eligibility criteria. These include owing no more than £15,000 in unsecured debts (£20,000 from October 2015), having a maximum disposable income of £50 a month and now owning any assets worth more than £300, except a car that can be valued at up to £1,000. You’ll also need to live or work in England or Wales.

dro credit rating

If you qualify for a DRO and your application goes ahead, all the unsecured debts listed within it will be cancelled after 12 months if your financial situation doesn’t improve in the meantime. During this time, you’ll have legal protection from your creditors and they can’t add interest or other charges to your accounts. So you could potentially walk away from your DRO after just 12 months with few or no debts remaining and without the financial burden of paying costly bankruptcy fees (a DRO application costs just £90).


However, as with all debt management solutions, there are downsides as well as benefits to a DRO. One of these is how your credit rating will be affected and your chances of obtaining credit in the future. This article from personal insolvency specialists, Bankruptcy Clinic, sets out some of the key facts you’ll want to know before you proceed.


  1. The Insolvency Service Register

When your DRO is set up, your details will be added to the Insolvency Service’s Annual Insolvency Register. They’ll remain there for three months after your DRO comes to an end. Being on the public Insolvency Register means that if you apply for credit, your prospective lender can search for your details on the register and find out if there are any current insolvency proceedings listed in your name.


This could make it harder to obtain credit during or just after your DRO. However, it’s important to note that you can’t apply for credit of £500 or more during your DRO without telling your lender about the DRO anyway.


  1. Credit reference agencies

There are three main credit reference agencies in the UK: Callcredit, Equifax and Experian. Each of these agencies holds credit files, which include information about your financial activities. The information held about you on these files is known as your credit history and is used by lenders to calculate your credit rating – in other words, how low or high risk you are as a potential borrower.


If the Official Receiver accepts your application for a DRO, they won’t automatically tell the credit reference agencies about it. Instead, the agencies are likely to find out about it from their normal search activities, which include regular checks of the Insolvency Register. So you can expect your DRO to be listed in your credit file sooner or later.


  1. The effect on your credit rating

If you’re applying for a DRO, the likelihood is that you’re not in a good place financially. This means there’s probably adverse information on your credit file already, such as records of missed payments and going over your credit limit. If your creditors have taken legal action against you in the past, such as a County Court Judgement (CCJ), this will show up as well.


If this is the case, applying for a DRO won’t make things any worse than they already are. In fact, once your DRO appears on your credit file, it could be seen as a ‘positive,’ as it’s proof that you’ve taken action to overcome your debts. There’s also the fact that you can’t apply for a DRO if your disposable income is under £50 a month – and there aren’t many lenders that will consider you as a customer in this situation.


  1. How long the DRO will stay on your credit file

Once your DRO is on your credit file, it’s there to stay for at least six years from the date it started. This will still be the case even if your finances improve during the DRO and it ends early, although you should still tell the credit reference agencies if this happens, so they can make a note on your file.


The DRO should automatically drop off your credit file after six years. If this doesn’t happen, it’s your responsibility to get in touch with the credit reference agencies and ask them to remove the information.


  1. Repairing your credit rating

Unfortunately, there’s no magic way to repair your credit rating quickly and you could still find it hard to obtain credit even after the six years have passed. However, there are now lots of financial products on the market that are suitable for people who want to rebuild their credit history.


These include personal loans (not payday or guarantor loans) and credit cards with low credit limits, but high interest rates. If used sensibly, with regular payments made each month without fail, these will add positive information to your credit file and in time, you may find you can access mainstream credit again.


Having said that, it’s crucial that you don’t apply for further credit until your finances have improved to a degree where you can afford to make monthly repayments. The last thing you want is to find yourself in the same situation again – and a second DRO or other form of personal insolvency won’t be viewed in a good light by lenders or the Insolvency Service.


Find out more

For more information about this or any other aspect of Debt Relief Orders, please contact Bankruptcy Clinic today.

Andy Gorton is the author and editor of the Bankruptcy Clinic

Andy Gorton – who has written posts on Bankruptcy Clinic Blog.

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