Does a Debt Management Plan Affect Your Credit Rating?

Posted by Kevin Pearce in Dealing with Debt on 18 June 2019 - Kevin is a Senior Credit Analyst at checkmyfile

If you’re feeling increasingly overwhelmed by debt and aren’t sure what steps you can take next, the most important thing to remember is that there is plenty of help available and different solutions designed to get your finances back on the straight and narrow.

Before making any big decisions related to debt, we would always recommend seeking independent professional (and preferably free) advice. A good starting point is the free advice in our own Debt Advice Centre.

Just one of the potential solutions to serious problems is a Debt Management Plan (DMP), which reduces the amount paid to lenders either by decreasing the actual amount you owe, or by convincing lenders to agree to freeze interest on the amount owed. Before proceeding with a DMP though, it’s important that you understand the potential ramifications it may have on your future ability to take out credit.

DMP's are often used as a last-ditch attempt to avoid bankruptcy or as an alternative to a Debt Relief Order and provide debtors who can afford to pay something towards a debt but cannot make the agreed-upon monthly repayments with a different option.

How do Debt Management Plans work?

A Debt Management Plan is intended to help you pay back money borrowed at a rate that is more affordable under your current circumstances, not unlike an Arrangement to Pay. DMP's cannot be used on secured loans (such as a mortgage) and are instead only available for use on unsecured, non-priority debts such as credit card payments, overdrafts and personal loans.

DMP's are typically arranged through a third-party provider and there are three main providers of free services – National Debtline, StepChange and Payplan. There are also a large number of providers that charge a fee, but you don’t have to use one if you don’t want to. In all cases, the provider must be authorised by the Financial Conduct Authority to ensure they meet certain standards.

If you do pay a fee, bear in mind that this will mean less money to distribute amongst your creditors, and so it could potentially take longer to settle.

DMP providers will talk openly with you to work out what you can afford to pay, and then negotiate with all applicable creditors to distribute this available pot of money amongst them within an agreed repayment structure.

Some lenders will agree to stop all interest and charges pertaining to a loan, or agree to lower your monthly amount and extend the duration of the agreement, but there is no obligation for them to do this. In instances where there is an option to increase the length of the credit agreement, keep in mind that you may end up paying more for the loan in the long term if interest isn’t frozen.

If you are under substantial financial strain and are at risk of missing mortgage or utility payments, a DMP may not go far enough to alleviate this burden, which is why we always recommend speaking to an FCA-approved financial advisor first.

It is worth keeping in mind that even under a DMP, lenders may still choose to proceed with further action to reclaim money owed, possibly in the form of a judgment or through a collection agency.

How will a DMP be reported on my Credit Report?

Entering into a DMP is likely to have a significant impact on your Credit Rating, and will harm your ability to get new forms of credit for some time.

There is no uniform way that lenders will report a DMP to the UK's Credit Reference Agencies. In some instances it may appear on your Credit Report as an Arrangement to Pay marker (an 'AR' symbol on a checkmyfile Credit Report), while some will use a specific 'DM' marker. Other lenders may only report the arrears themselves.

Even though entering a DMP is likely to harm your Credit Rating, taking pre-emptive action should ensure that you are able to address your debt problems before they escalate further. It is also likely that if you are in a position where a DMP is necessary, you’ll have already been rebuffed in any attempts to refinance, and so won’t notice much difference in your ability to get new forms of credit.

How long will a DMP appear on my Credit Report?

Each account included within your DMP should automatically drop off your report once 6 years have elapsed from the date of account closure. Once this happens, it will no longer have a negative impact.

You can leave a DMP at any time but the markers used to record the DMP itself will still remain for what’s left of the six years, and will be visible to lenders. You will also need to take care not to prompt lenders into taking further recovery action if you do choose to leave a DMP before any agreed debt repayments have been made.

It’s also important to not let a DMP run for longer than is necessary. Because accounts can be reported for up to 6 years from the date they are closed, the longer a DMP is in place, the longer those affected accounts will continue to show on your Credit Report – potentially meaning they stay visible (and affect your ability to get credit) for a significant amount of time.

How will it affect my ability to take out credit?

Lenders usually interpret DMPs similarly to a write-off, which is when a lender is suitably convinced that they would not be able to reclaim the original amount owed in its entirety and as such they would be prepared to accept a smaller amount if it’s a choice between that and getting nothing at all.

If a prospective lender checking your Credit Report sees any evidence to suggest that previous lenders have had to forgo a chunk of the amount they were owed, it may be far more reluctant to take you on as a customer, for fear of the same happening again.

Much like missing payments, the fact that you have effectively had to renegotiate with previous creditors will act as a red flag.

Ultimately, whilst entering into a DMP might mean that it’s harder to get new credit facilities for the foreseeable future, it is designed to alleviate financial pressures and help you come to an agreement with existing creditors and get your finances back in order.

It’s important to remember that the impact of doing so won’t last forever, and that it could prevent creditors from starting their own recovery action, which would likely have a much greater impact on your credit rating.

More than anything though, if you are struggling with debt, don’t just stick your head in the sand. There is a huge amount of help available, lots of it completely free, and plenty of options besides a DMP.

Whether you have had to negotiate with creditors or not, you can see how a prospective lender would be likely to judge you by checking your Credit Report online for yourself. If you haven’t already, you can try checkmyfile FREE for 30 days, then for just £14.99 a month afterwards, which you can cancel online, by phone or by email.

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