How will a Debt Agreement effect my credit file?
A Part 9 Debt Agreement is a government legislated agreement which allows you to reduce the overall amount of debt you owe as well as freeze the interest and fees over 5 years. You are left with one affordable, manageable repayment. So why aren’t more Aussies using this agreement to manage their debt? Because of the effect it will have on their credit file.
But if you are really struggling to make your repayments, being harassed by creditors and feeling the severe stress of your debt, is a default on your credit file really a problem? Will it truly effect you the way you think?
Considering a Debt Agreement?
If you are considering a Debt Agreement, your debts must be at a point where they are no longer manageable. You might be several months behind in your repayments and being harassed by your creditors or debt collectors. If you are at this point, chances are you already have at least one default placed on your credit file. A default will last for 5 years and while it is on your credit file, it can be difficult for you to borrow any more money in a loan or credit card.
To check if you have received a default, you can request a free copy of your credit file from www.mycreditfile.com.au. Your credit file will have a record of the majority of your debts and enquiries and list any defaults and judgments against you.
The mark you receive on your credit file when you enter a Part 9 Debt Agreement is the same as these financial defaults. If you already have a default, entering a Part 9 Debt Agreement won’t make much of a difference. In fact, entering into the agreement will prevent you from getting even more defaults, so in a way it can save your credit file.
Entering a Part 9 Debt Agreement
The day you enter a Part 9 Debt Agreement, a financial default is marked on your credit file. It will remain there for 5 years and one day. This means each time you apply for a new loan or a credit card during these 5 years, the creditor will be able to see you are in a Debt Agreement and are likely to refuse your application. A Debt Agreement can also impact some professions which require a license, like real estate agents, accountants and some trades. Be sure to check with your industry licensing authority before proceeding with a debt Agreement.
Once the debt Agreement is over
If you have made all your Debt Agreement repayments on time and are paying it off within its expected timeframe, once your Debt Agreement has finished, the default it placed on your credit file will drop off and your credit file will be clear. It may take 3-6 months for your credit score to build back up as you gradually start to show some good new behavior on your credit file.
Once you have repaid a Debt Agreement, you can rebuild your credit score by applying for a small loan, one which you know you can afford the repayments. Then, as you pay that off, the activity on your credit file will help to rebuild your score. Once you’ve repaid your small loan, your credit score will be at a normal level and you should be able to borrow from the big 4 banks without issue.
These are some of the excuses we hear when people are considering a Debt Agreement.
I want to buy a house within the next 5 years. It’s fantastic to set financial goals as it will encourage you to figure out a budget and properly manage your money. But if you are struggling to repay $50,000 in credit card debt, what are the chances you will be in a financial position to buy a house in the next 5 years? A Debt Agreement is a repayment plan designed to help you pa off your debt in 5 years and it might be exactly what you need to help you achieve your dream of home ownership.
I may as well just declare bankruptcy. Bankruptcy is always an option for people struggling with debt. but the short and long term effects of bankruptcy are very restrictive and might not be worth the benefits over time.
I don’t need a Debt Agreement, I just want to consolidate. Consolidating your debts is incredibly difficult these days. Lenders have changed their lending criteria and there is no such thing as a consolidation loan anymore. it is also very difficult to borrow enough to pay out all your debts if you have a default or you are struggling with your repayments. Debt Consolidation is certainly an option if you have equity in your mortgage, otherwise, you might have to look at alternative options.