Debt is an unfortunate reality for many people in the UK. In fact, according to a report by The Money Charity, the average UK household debt, including mortgages, stood at £60,363 in August 2022. With such high levels of debt, it’s no surprise that many people turn to debt management plans (DMPs) as a solution. However, while DMPs can provide some relief, they can also have an impact on credit reports. In this blog post, we’ll explore the impact of DMPs on credit reports and what you can do to manage it.
What is a Debt Management Plan?
A DMP is an informal agreement between you and your creditors to repay your debts at a reduced rate. This means that you’ll pay a lower amount each month, making it more manageable to pay off your debt. DMPs are usually set up and managed by debt management companies who will negotiate with your creditors on your behalf.
Impact on Credit Reports
While DMPs can provide some relief from the burden of debt, they can also have an impact on your credit report. One of the main ways that DMPs impact credit reports is by showing up as a ‘debt management plan’ on your credit file. This can make it harder to get credit in the future as it indicates that you have had difficulties managing your debts in the past.
Another way that DMPs impact credit reports is by reducing your credit score. This is because DMPs are seen as a form of ‘default’ on your credit file. Defaults are recorded on your credit file when you fail to make your monthly payments as agreed. They stay on your file for six years, even after you’ve paid off the debt.
Managing the Impact
If you’re in a DMP or considering entering one, it’s important to understand the impact it can have on your credit report. Here are some tips on how to manage the impact:
- Keep up with your DMP payments While it may seem obvious, keeping up with your DMP payments is essential for managing the impact on your credit report. By making your payments on time, you’ll avoid defaulting and further damaging your credit score.
- Check your credit report regularly It’s important to keep an eye on your credit report, especially when you’re in a DMP. This will allow you to see how the DMP is impacting your credit score and take action if necessary.
- Be patient Remember that DMPs are designed to be long-term solutions. It can take time to pay off your debts, but by sticking to your DMP, you’ll eventually be debt-free.
- Consider a debt relief order or bankruptcy If you’re struggling with debt and a DMP isn’t working for you, there are other solutions available. A debt relief order (DRO) or bankruptcy may be more appropriate for your situation. However, these options also have a significant impact on your credit report and should only be considered as a last resort.
5 Common Myths About Debt Management Plans
- Myth: DMPs will completely erase your debt. Fact: While DMPs can make debt more manageable, they won’t completely erase it. You’ll still be responsible for paying off your debts, albeit at a reduced rate.
- Myth: DMPs will always harm your credit score. Fact: While DMPs can have a negative impact on your credit score, it’s not always the case. By keeping up with your DMP payments, you can minimize the impact on your credit score.
- Myth: DMPs are only for people with a lot of debt. Fact: DMPs are suitable for people with any amount of debt. They’re particularly helpful for people who are struggling to make their monthly payments.
- Myth: You can’t get credit while in a DMP. Fact: While it may be more difficult to get credit while in a DMP, it’s not impossible. You may be able to get credit, but it will likely come with higher interest rates and stricter conditions.
By understanding the truth behind these common myths, you can make a more informed decision about whether a DMP is the right solution for your debt situation. Remember, seeking advice from a debt management company or a financial advisor is always a good idea before making any decisions about managing your debt.
In conclusion, debt management plans can provide some much-needed relief for people struggling with debt. However, it’s important to understand the impact that DMPs can have on your credit report. By following the tips outlined above, you can manage the impact and work towards becoming debt-free.