Wondering if a debt management plan will affect your credit report? Cashfloat explores to what extent a DMP can damage your credit rating, and how that will affect you in day-to-day life.
- You can ask your DMP provider for an indication of how your credit score will be affected by starting a DMP
- A DMP may have less of a negative impact on your credit score if you set it up yourself
Cashfloat is a short term loans provider based in the UK. Cashfloat’s short term loans and payday loans help customers to overcome short term financial problems. As well as providing solutions to short term financial problems, we also help people with our guides and informative articles.
This guide is devoted to debt management plans, which are a common solution to debt in the UK. In this article we will explain how being on a debt management plan will affect your credit score.
Seek Help and Advice With Your Debts
Before you try and solve your debt problems, it is important to make sure that you are taking the right approach. Debt management plans are only one way to solve a debt problem. Before you embark on a debt management plan, you should make sure that it is the right approach to the debt problems that you have. Fortunately for people who are in debt, there are now many free, professional organisations, such as Stepchange and Payplan, who will offer free debt advice to people who are struggling with debt. As well as offering advice, many of these organisations will also support people all the way through their recovery from debt.
Will a Debt Management Plan Damage Your Credit Rating?
For people who are struggling to repay their debts, debt management plans (DMPs) offer a way to escape the situation. If you are unable to repay your debts at the rate you originally agreed with your creditors, being on a debt management plan will allow you to pay off your debts in monthly amounts that you can afford and often without the burden of interest and fees. A debt management plan can reduce stress, lessen the pressure which creditors put on you to repay money and can get your finances back on track. That said, being on a debt management plan does have its downsides.
One of the major downsides is that, even if your creditors are happy to agree to a debt management plan, for the vast majority of people it will have a negative effect on their credit rating. For most people their credit rating will be damaged for the entire time they are on the DMP. You will be able to repair your credit score after your debt management plan has finished.
Other debt solutions, such as bankruptcy and debt relief orders are specifically recorded in your credit report. While debt management plans are not specifically recorded, your credit report will be affected in other ways. Credit reports will often have partial payments, defaults and ‘payment arrangement’ notes added to them during the course of a debt management plan. This will damage your credit score and, in turn, this may have an effect on various aspects of your life.
The Affect of Debt vs the Affect of a DMP on Your Credit Rating
While your credit rating will be harmed by a debt management plan, many people who begin one will already have a damaged credit rating, where they have been failing to pay their debts. Being on a debt management plan will look better on your credit report than having unpaid debts or debts which you only make infrequent payments towards. To find out more about how your credit score is affected by a DMP and what this could mean for you, read on.
Why Does Your Credit Rating Matter?
Credit ratings are used by people who provide credit to assess how much of a risk a person is. Money lenders and other providers of credit use credit ratings to decide whether or not to provide someone with credit and, if they do decide to do so, under what conditions they will provide it. Having a poor credit rating may mean that some forms of credit are unavailable or that they are expensive or come with conditions which are more difficult to meet. See information on Cashfloat’s bad-credit payday loans here.
Check Your Credit Score
One thing you can do, if you are wondering what your credit score is, is check it! The three main credit reference agencies in the UK, Experian, Equifax and Transunion provide personalised credit reports, which you can access online. Sometimes these can be accessed for free and, on top of this, they must provide you with a statutory credit report for free if you request one.
How Badly Will a Debt Management Plan Damage Your Credit Rating?
The extent to which a debt management plan affects your credit rating will depend on your circumstances. If you have your debt management plan arranged for you by a debt charity, such as the Debt Advice Foundation or Christians Against Poverty, you can ask them to give you an indication of how much your credit rating will be affected. If you have arranged your own DMP or are unable to find out from your DMP provider, then you can speak to National Debtline or Citizens Advice for advice.
Being on a debt management plan normally has quite a serious effect on a person’s credit rating. That said, by the time you are in need of a debt management plan, incurring damage to your credit score is usually unavoidable. Being on a debt management plan will also help you to, eventually, repair it as well.
How a Debt Management Plan Shows Up in Your Credit Report
As mentioned, other debt solutions, such as individual voluntary arrangements (IVAs) or debt relief orders (DROs), are specifically recorded in your credit report. Debt management plans are not. That said, the arrangement you make with your creditors may be noted as a ‘payment arrangement’, which indicates that you are on a debt management plan and partial payments, defaults and county court judgements or decrees may all be noted in your credit report for your debts. Any entries in your credit report of this kind will negatively affect your credit score.
Under a debt management plan you will normally pay monthly amounts towards your debts that are less than the monthly minimum you originally agreed with your creditors. Even if your creditors are happy to accept your offer, the payments that you make will be recorded as partial payments in your credit report.
Each account that you have with your creditos may have a marker added to it, which says that you are making payments under a ‘payment arrangement’. This is known as a ‘DMP flag’ and indicates that you have entered a debt management plan.
Your creditors often record you as having defaulted on your debt when you are in a debt management plan. They may sell your debt to a debt collection agency when this happens. Normally, you will be able to continue making your normal DMP payments when your debt is defaulted. However, the default will be recorded in your credit report.
In some cases, creditors will pursue legal action against a person who is in a debt management plan. This can result in a CCJ or a decree being added to your credit report.
Setting Up Your Own Debt Management Plan and the Affect on Your Credit Score
One point worth noting is that people who are able to arrange their own debt management plan may do less harm to their credit score. The notes which creditors add to your debts about the arrangement you make with them can be less damaging if you carry out your own negotiations by yourself, rather than doing it through a debt charity or debt management company.
Note that Cashfloat recommends that you use a debt charity to arrange a debt management plan, rather than a fee charging debt management company.
For How Long Does a Debt Management Plan Affect Your Credit Rating?
Any additions to your credit report as a result of your debt management plan will stay there for six years from the date it is recorded. Any recorded entries will be removed after this period. It is possible to limit the damage a DMP does to your credit score by sticking to making your payments and by following other good practices. However, for most people, the opportunity to repair the damage done to their credit rating does not really come until their debt management plan finishes.
For many people their creditors will either mark their debts as defaulted or will add a ‘payment arrangement’ note to them and not default them. When people have defaulted debts, the entry will stay on their credit report until six years after it is first defaulted. For some people this will mean that the entry leaves their credit report before they have finished their debt management plan. For people whose debts are given a ‘payment arrangement’ note and not defaulted, the entry will leave their credit report six years after they pay off their debt. This is usually at the end of a debt management plan. While this is the case, the account will be marked as settled and you should be able to rebuild your credit rating after this period.
While you are in your debt management plan it is a good idea to check your credit report and to keep on top of any entries which are added, so that you know what is happening to your credit score. If you are at all unsure about how your credit score will change while you are on your DMP, you can also speak to your DMP provider and they will be able to give you a clearer indication.
How Having a Damaged Credit Rating Will Affect Your Life
The damage to a person’s credit report, while they are on a debt management plan, can have an impact on their life.
While it is possible to borrow money while you are on a debt management plan, it is not advisable. Often doing so can be a breach of a DMP agreement. Cashfloat strongly recommends that you do not attempt to take out any of their payday loans or short term loans while you are on a DMP.
People who do attempt to take out credit will find that it is more difficult to find a lender, it is more expensive and they may also have to meet other requirements. They will also face this problem while their credit score repairs after they have finished their DMP, although to a lesser degree over time.
Lenders will see you as more of a risk and will be more reluctant to lend you money. Where they will lend you money, they will often offer lesser amounts and charge a higher interest rate. This will make borrowing more difficult and expensive while you are on a debt management plan and during the period after it, while your credit score improves. Some lenders may require you to provide a guarantor for loans that they offer. One common wish that people have while they are on a DMP, is to take out a mortgage. While this is not impossible, as with other forms of borrowing, it is likely to be difficult. Have a look at Chapter 8 of this guide for more information on this.
Other Problems it May Cause
It is not just money lenders who may look at your credit score. Having a poor credit score may have an effect on your ability to rent a property, take out a phone contract or pay for car insurance. Your poor credit rating may also have a knock on effect for people who you are financially linked to.
Some prospective landlords may check your credit report before deciding whether or not to rent a property to you. Seeing that you are on a debt management plan may make them reluctant to do so or they may ask that you provide a guarantor for your tenancy agreement. Car insurance paid in monthly instalments may come with a higher rate of interest and expensive mobile phone contracts may be harder to obtain.
One important point about the effect of having a damaged credit score, as a result of being on a DMP, is that this can have a knock on effect for people you are financially linked to. This may be your partner. An important thing to do, when you begin a debt management plan, is to minimise the effect it will have on people you are financially linked to. For more information on this, go to Chapter 7 of this guide.
When Will Your Credit Rating Repair After a Debt Management Plan?
For most people, the opportunity to repair their credit rating comes after their debt management plan has finished. There are things you can do to improve your credit score while your DMP is in place and after it finishes:
Check your credit report
You should regularly check your credit report for inaccuracies. Incorrect information may harm your credit score and removing it will help your credit score to improve.
Register on the electoral roll
Registering on the electoral roll helps lenders to verify your personal information and this can boost your credit score.
Pay your bills on time
This is the most important thing that you should do. Paying your priority bills and sticking to the payments that you agree to make in your debt management plan will help to improve your credit score while it is ongoing. After your debt management plan finishes, paying all of your bills on time will show that you are financially responsible and will be the most important thing in improving your credit score.
Debt management plans are a good solution to debt which are used by many people in the UK who find that they are struggling with debt. As with all debt solutions, they do come with consequences. One of the major consequences of starting a debt management plan is the negative effect it has on your credit rating. The consequences it has for your credit rating can be bad and this can have an impact on your life. That said, debt management plans do provide a solution to debt and help people to get their lives back on track. They also come at a time when people’s credit rating is under threat anyway and can be less harmful to your credit score than other debt solutions. Once a DMP finishes, a person will also be able to rebuild their credit score.
Interest and Fees While on a Debt Management Plan
Debt Management Plans for Young People