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.

Late Payments & Defaults: What's The Difference?

When a lender checks your Credit Report, one of the most important elements it considers is payment history as reported to the Credit Reference Agencies. On a perfect applicant’s Credit Report, every credit account would be reported with a clean payment history, indicating that they are a low risk to the prospective lender, but in the real world this isn’t always the case.

Published on 23 Apr 2019 by Tom Blandford

Full Article

Do I Owe a Debt If It's Not On My Credit Report?

Information that appears on your Credit Report should (in most cases) follow a fairly predictable lifecycle. But don’t think that if an unpaid debt no longer shows up, you’re no longer responsible for it.

Published on 21 Apr 2019 by Tom Blandford

Full Article

Do I Have a Default? How to Find Out

For lots of lenders, coming across a Default on your Credit Report is a troubling sign. It’s certainly more serious than a missed payment or arrears on your file, which are likely to have less of an impact on your chances of being approved. A Default represents a key moment in the eyes of a lender: it shows that on a previous credit agreement you stopped being a borrower and became a debtor.

Published on 29 Mar 2019 by Jamie Mackenzie Smith

Full Article

Do I Have a CCJ? How To Find Out

If you have a County Court Judgment (CCJ) in your name, it can have a serious impact on your Credit Score and ability to borrow for the entire time it is active, as well as potentially affect the outcome of the checks carried out by prospective employers, landlords and insurers.

Published on 26 Mar 2019 by Jamie Mackenzie Smith

Full Article

How Bankruptcy Affects Your Credit Rating

In terms of negative information that could appear on your Credit Report, evidence of bankruptcy or other forms of insolvency is about as serious as it gets and it’s likely to adversely affect your ability to take out new forms of credit for a considerable amount of time.

Published on 7 Mar 2019 by Tom Magor

Full Article

Insolvency and its effect on your credit score

Contrary to the belief of some, insolvency is not a ‘get out of jail free card’. When you are declared insolvent, the entry remains reported for six years on your Credit File and will continue to pose a significant barrier to your chances of obtaining credit – even after the insolvency is discharged.

Published on 30 Jan 2019 by Tom Blandford

Full Article

Can you go to prison for debt

The short answer is: yes, you can go to prison for debt, but only if you fail to pay your council tax, any magistrates fines, TV license or fees relating to a motoring offense, and even then there are plenty of methods that are usually tried before a prison sentence is carried out.

Published on 22 Aug 2018 by Barry Stamp

Full Article

Northampton Court CCJ – Why is it on my Credit Report?

If you’ve been issued with a CCJ, chances are that it could appear on your Credit Report as having come from Northampton County Court Business Centre (CCBC), even if you or the claimant have no ties with Northampton whatsoever.

Published on 31 Jul 2018 by Jamie Mackenzie Smith

Full Article

What Happens When You Miss a Payment?

Late payments are a reasonably common entry on Credit Reports. They can occur against all kinds of credit agreements: everything from mortgages to store cards and unless you have a Direct Debit set up to make repayments automatically each month, you’re reliant on remembering to physically make your repayments each month. For a lot of people, this is where mistakes happen.

Published on 6 Jul 2018 by Kiah Phillips

Full Article

If I Pay My CCJ Will It Go Away?

2017 saw the highest number of County Court Judgments (CCJs) issued in England and Wales since records began in 2005, according to official figures by Registry Trust. That means it’s more important than ever to make sure you know what to do if you get issued with one, and how to prevent one appearing on your Credit File in the first place.

Published on 23 May 2018 by Ben Ryland

Full Article
keyboard_arrow_left

keyboard_arrow_right

We are rated number 1 for customer service on