How Does Debt Review Affect Your Credit Score?

Debt review is a powerful legal tool for over-indebted consumers, but it has a significant and direct impact on your credit report and, by extension, your credit score. It's essential to understand both the immediate consequences and the long-term recovery process.

Immediate Impact: The 'Under Debt Review' Flag

As soon as your debt counsellor accepts your application and notifies your creditors (by issuing a Form 17.1), they also notify all the registered credit bureaus.

The bureaus will immediately place a flag on your credit profile, indicating that you are "Under Debt Review". This flag has two primary effects:

1. Blocks New Credit: This flag serves as a warning to all credit providers that you are legally over-indebted and are in a formal repayment process. As a result, you are legally barred from taking on any new credit. You cannot get a new loan, a new credit card, or any form of credit while this flag is on your profile.
2. Credit Score Impact: While the flag itself isn't a 'score-killer' in the same way a judgment is, the circumstances leading to debt review (high debt, missed payments) mean your score is already likely to be low. The process is designed to fix the underlying problem rather than to boost your score in the short term. The primary goal is protection and rehabilitation, not immediate score improvement.

During the Debt Review Process

As you make your single, consolidated monthly payments through the Payment Distribution Agency (PDA), your debt counsellor and the PDA provide regular updates to the credit bureaus.

Your individual account statuses will be updated to reflect that they are part of the debt review plan. Consistent payments under the plan are a positive signal, but your score will not see significant improvement until the process is complete.

The Path to Recovery: The Clearance Certificate

The most crucial part of the process for your credit score is the end goal: obtaining a Clearance Certificate (Form 19).

This certificate is issued by your debt counsellor once you have:

• Paid off all your short-term debt (personal loans, credit cards, etc.) that was included in the plan.
• Caught up on all arrears on your home loan, if it was part of the plan.

Once issued, the debt counsellor sends the Clearance Certificate to the credit bureaus.

The Post-Debt Review Turnaround

Upon receiving the Clearance Certificate, the credit bureaus are legally obligated to do two things:

1. Remove the "Under Debt Review" Flag: This is the most important step. It signals to the credit market that you are no longer in the process and are legally allowed to apply for credit again.
2. Remove All Default Information: All historical default listings for the accounts that were part of the debt review must also be removed.

With these negative flags and listings gone, your credit report will look significantly cleaner. Your credit score will often see a substantial and relatively quick improvement. You are essentially starting with a clean slate, and your score will now be primarily influenced by your current financial behavior.

In summary, debt review has a necessary and immediate negative impact by blocking access to credit. However, it is a rehabilitative process. By completing it successfully, you clear your report of major negative listings, paving the way for a much healthier credit score in the long run.