How Does a Debt Management Plan Affect Your Credit Rating?

A DMP (Debt Management Plan) is an effective way of managing your outstanding non-priority debts – such as credit cards – if you’ve been finding it difficult to keep up with repayments. You pay back your debt in one monthly repayment that is split accordingly between your creditors.

You will usually work with a DMP provider like PayPlan who will deal with your creditors to set up this informal agreement for you.

It’s important before taking on this solution that you understand how it could affect you – most importantly your credit rating. Here is our quick guide on DMPs and their effect on that all important credit report:

How is your credit rating impacted?

If you already have things like defaulted accounts, maxed out cards and missed payments it is likely that you have a bad credit rating and you will find it harder to get credit in the near future anyway.

Most of these issues will stay on your credit report and affect your credit rating for six years – so a DMP may not actually make a difference to your chances of getting credit in the short term.

You may be surprised to learn that DMPs are not listed on your credit report – instead, a marker may be added to your credit accounts to say that you paying them back using this solution.

A DMP is not a legally binding agreement and so your creditors can continue to chase you for payment and apply charges and interest to what you owe – meaning if you miss anymore more payments these can still go against you.

When you complete a DMP, after six years any defaulted and settled accounts included, will disappear from your credit report and won’t affect your credit rating after that.

While a DMP is not listed as a separate entry on your credit report, potential lenders will see your debts being settled in this way, which may affect their decision to lend to you – potentially leading to application rejections or higher interest rates.

Why is my credit rating so important?

When you apply for credit – whether it’s a credit card or car finance – the potential lender will take a look at your credit report. This will show them your current credit rating and whether you could be considered a risk or not.

Your credit rating is affected by a number of factors and this is why you need to understand how a DMP will impact it – we have more information about what affects your credit score available to read on the site.

Maintaining a good rating and ensuring your report is clear of any negatives – such as defaults or high levels of outstanding or late debt – is the goal. Remember, it’s never too late to fix a low credit rating.

Is a DMP right for me?

A DMP could be the right choice if you are managing your priority debts well (mortgage, utility bills etc.), but are struggling with non-priority debts (credit cards, personal loans) and want a simple way of managing your debts in one monthly repayment. We have lots of information on the site about DMPs to help you make the right decision.

Our friendly, expert team are also on hand six days a week to answer any questions you may have about DMPs, to ensure you make the right decision to suit your needs.