A Debt Management Plan (DMP) can be a great way to take back control of your finances if you have been struggling with problem debt, but the solution does not come without its drawbacks. One issue to bear in mind when considering a DMP – or any debt solution – is how it will affect your credit score.
Below we outline the key ways in which using a DMP could affect your credit score and by extension your access to credit.
What is a Debt Management Plan (DMP)?
A Debt Management Plan, or DMP as it is also known, is a plan that you can put in place with your creditors to repay your debts. This works by arranging for all of your monthly payments to creditors to be sent directly from your bank account each month, in the form of one affordable monthly payment.
The benefit of this debt consolidation is that it means you won’t miss any repayments, so your credit rating won’t be affected by falling into default.
With Debt Management Plans, you may be able to agree lower monthly payments with your creditors (i.e. credit card companies), who may be willing to accept less than your total debt rather than chasing you for full payment.
You can approach your creditors yourself and suggest setting up a Debt Management Plan to settle your outstanding debts. Alternatively, many people choose to set up a DMP via a third party company specialising in debt repayment plans.
What debts can be included in a Debt Management Plan?
A Debt Management Plan can be used to deal with most types of unsecured debt. Debts that are typically brought into a DMP include:
- Credit card debt
- Personal loans
- Overdrafts
You can’t include secured debts (debts secured an asset like a home or car) in a Debt Management Plan. If you have other priority debts, like a mortgage or hire purchase agreement, you should keep making payments alongside your DMP.
What is my credit report and why is it important?
Your credit report is a statement that documents your financial and credit history, including all of your successful transactions, as well as any late payments, debts, and charges. Your credit rating is based on the information in your credit report.
Your credit rating (or credit score) is a representation of your chances of being accepted for credit. Credit is crucial to your financial freedom. The better your credit rating is, the more likely you are to be accepted for a credit agreement like a mortgage deal or a new credit card.
Banks and other lenders typically use credit reference agencies to run a credit check on new customers. If they discover you have a low credit score, they will see you as a financial risk and are less likely to lend money to you.
Do Debt Management Plans affect your credit rating?
A DMP will probably have a negative impact on your credit rating, at least temporarily, and here’s why: Because under a DMP, you will be making reduced payments towards your debts.
While this is something your creditors agreed to and were happy to accept, any instance of an individual failing to repay their debts in full is flagged on their credit report, and sends a signal to future lenders that they have had financial problems in the past.
While this can be frustrating in the short-term, Debt Management Plans can actually have a positive impact on your credit in the long-run.
How will a DMP impact my credit?
Below are some of the key impacts a Debt Management Plan will have on your credit profile.
A DMP shows reduced monthly payments
Although DMPs are an informal debt solution, so are not recorded on a public register like an IVA, records of your lowered monthly payments will make it onto your credit file.
As mentioned previously, while reduced monthly payments will help you maintain your Debt Management Plan alongside your living costs, they are a red flag to future lenders and will therefore damage your credit rating.
You can’t access further Credit during a DMP
Some DMP providers will only provide their services if you agree not to take on further credit, and in any case, it is usually best avoided.
Your creditors may stop supporting your DMP if you take on more credit, since this suggests that you can afford to make standard repayments, but are only offering them a reduced amount.
If you do choose to apply for further credit during the course of a DMP, you will probably only have access to the services of high-interest, short term lenders.
Your will need to rebuild your credit at the end of your DMP
Your credit file holds a record of your credit activity for the last six years. This means that evidence of a DMP will not drop off your credit file until six years after your final payment was made. There is plenty you can do to rebuild your credit score once you pay off your debts:
- Registering on the electoral roll
- Making sure all details on your credit report are correct
- Taking on small amounts of credit
Will a DMP improve my credit in the long run?
If you have missed payments on your debts, which is likely if you are considering a DMP, it is worth bearing in mind that your credit score is probably quite low as it is.
A DMP will negatively affect your credit score, but so will continuing to struggle with problem debt. Using a debt solution to clear this debt can give you a fresh start, and result in a better credit score in the long run.
Conclusion
A DMP can help you deal with your unaffordable debt, but it can negatively affect your credit score for some time. Over time, however, your credit score will gradually improve.
If you’re struggling to manage your debt repayments alongside living costs and other expenses, you may be worried that your creditors will run out of patience.
Nobody should have to live with that stress, and we can make sure you don’t have to. UK Debt Expert are one of the UK’s leading providers of debt solutions, and we have all the expertise you need to get your finances back under control.
