How does a debt relief order affect your credit rating?

If you believe a debt relief order (DRO) is the best solution for your situation, you need to also consider how it will affect your credit rating. A negative credit rating is one of the biggest consequences that comes with applying for a DRO – as it will mark you as a higher risk to lenders.

What is a debt relief order?

A debt relief order is a formal debt solution that discharges you from your debts after a 12-month period, known as the ‘moratorium’. During the moratorium, you’re not required to pay anything back and your debts will be cleared.

A DRO is only suitable for debts less than £30,000 in England, Wales and Northern Ireland. You won’t be able to apply if you’re a homeowner and you must meet the other criteria. There are several things you need to consider before applying for a DRO, one of which is how it will affect your credit rating.

Why does a debt relief order affect your credit rating?

A debt relief order will negatively affect your credit rating, which means you may struggle to get a loan from official providers. This is because it suggests that you were unable to make planned repayments and so are a risk to future lenders – therefore a lower credit rating is applied as a warning to others.

Your credit report contains your personal financial details that include; how you’ve managed previous bank accounts, scheduled payments and credit commitments. It will also detail the people you’re financially linked to and whether you’ve ever had your home repossessed. This assessment will determine how much of a risk lending to you would be and if they think you’ll be able to repay the loan. Those lenders who may accept an application from you may only offer very high-interest rates, to protect themselves in the long run.

How does a debt relief order affect applying for a loan?

As a DRO will be noted in your credit reference file, it may reduce your chances of getting any sort of credit. This is because it will mark you as a risk – because you’ve been unable to keep up with payments in the past.

This note will stay against your credit reference file for up to six years, from the date the DRO was issued. Legally you’re not allowed to claim credit for £500 or more without telling the providing lender that you have a debt relief order during the moratorium period, once you are discharged this restriction should be lifted.

How does a debt relief order affect renting a property?

Unfortunately, because of the consequences stated above you may find it difficult to rent a new home. This is because many letting agencies and private landlords will complete a credit check when you apply for a new tenancy. The credit check will again bring up your credit report featuring details of your debt relief order and so you may be turned down for a tenancy agreement.

How can you improve your credit rating?

There are ways to improve your credit rating during the six-year period – after your order has been discharged. This can take a lot of time but it will be worth it – as it’s the first step to becoming financially stable. We have a comprehensive guide available that can help when you wish to improve your credit rating – click here to view this.