Understanding credit reports and how they are affected by DMPs
By James Jones from Experian
Credit checking is a mystery to some, so how does it work?
Basically, lenders obtain your consent to share and access information about your credit agreements through credit reference agencies like Experian. We combine these records with others, such as court judgments and insolvencies, to create what is called your credit report. We can produce a credit report for most adults in the UK.
You will usually give the lender permission to check your report when you apply for credit. If your report shows that you’re a reliable customer then it can help you get the credit you ask for. Most lenders use a technique called credit scoring (or ‘credit rating’) to help them work out the chances of you repaying credit, based on your credit report and any other information they have about you.
Despite frequent reports of an impending debt meltdown, the credit report data Experian hosts show that the vast majority of people continue to meet their credit repayments. The average Experian Credit Score – which is a guide you can get with your own credit report – is 783 out of 999* and this has increased steadily over the past few years. However, it’s clear that many people are worried about repaying their debts and, from the increasing workload of free debt advice providers like Payplan, that more people are seeking help.
If you’re in this boat, you might be considering a Debt Management Plan (DMP) to help get your debts under control. The state of your credit rating is likely to be way down your list of priorities, but you might still wonder what effect a DMP will have on your creditworthiness.
DMPs aren’t themselves registered on credit reports, but lenders can add a marker to your credit agreements to show you’re repaying your debts using a DMP. They can only do this for debts that haven’t already defaulted (see below), to demonstrate that you are proactively repaying your debts at an acceptable level.
The DMP marker should show your old and new monthly payments. Unfortunately, the monthly updates your lenders make will usually show the accounts falling into arrears (i.e. you getting behind with your original repayments). But as long as you keep up the new payments through your DMP, the arrears registered on your credit report will never exceed six months and, importantly, each account will stay out of default. Defaulted accounts show that the lender/borrower relationship has broken down, which is very bad news for credit scoring.
Once you complete your DMP, each account can either be returned to good order or closed, in which case it will stay on your credit report for a further six years. Credit assessment tends to focus on your most recent credit history and should take account of the age of any late payments, plus the fact that they occurred while you were taking positive steps to deal with your debts.
You can add an explanatory statement (a ‘notice of correction’) to your credit report and you could use this to explain why you got into difficulties in the first place. You could also use this to flag up a current DMP if your debts have already defaulted, or will default because you are only able to make very small repayments. There is guidance on how to word your notice on the Experian website.
The key issue is that, if you stick with your DMP, you’ll be back in control of your debts. And no matter how severe a credit scoring hangover you are left with, time is a great healer and your credit record will soon recover.
*www.creditexpert.co.uk – January 2012
Comments 4
I took out loans and credit cards in abundance 10/15 years ago, they have since been defaulted on, I am now paying them back via a dmp with payplan and have been doing so for about 7/8 years. The debts have been sold onto to third party’s on several occasions per original lender, both my wife and I am now out of work with 3 young children, I am seeking work but to no avail, where do I stand, I am only paying £11.50 a month, but even that is a strain at present.
If you are only paying £11.50 a month and that is a strain, you need to ask yourself how long it will be before you can make increased payments as otherwise it would be sensible to look at other options which will depend on your family circumstances and likelihood of finding well paid work in the foreseeable future. You have enough on your plate without the worry of the debts adding to it. Give your case officer a ring and ask to discuss your options – that is what they are there for and will be happy to help.
What a load of rubbish. You can’t get a mortgage for 4 years after you are discharged from a dmp unless you get adverse credit mortgage and even though the rates are higher. You still get defaults while in a DMP! Defaulted accounts are not closed on Experian they just show zero balance and a big pink default for 6 years. Do not take out a dmp unless you do not need a mortgage or remortgage. To move house etc. You do not know when you will need credit again. The past will haunt you for a long time and God help you if your over 50 and need a mortgage as you need a fantastic pension, but the ageist banks can get away with this and it is ok for them to default as we pay that back but we can’t default the banks!
That may be true but how else do you get rid of unaffordable credit. Any solution which allows you to repay less than the contractuals or writes off debt is going to have an impact on your credit rating – only making the full payments or repaying the amount in full is going to leave it intact. Most people who come into debt management schemes have already got defaults or at least have late payments or nil payments marked on the credit file. You should not go into a debt management plan if you are looking to maintain a credit rating or want to borrow more money. It is true that at the present time mortgage lenders are very careful about who they lend to but it is not impossible to get back onto the mortgage ladder if you havea deposit. A lot of people are already in mortgages when they enter debt management plans. What a debt management plan is not is a way of paying less out to your creditors whilst retaining the benefits of a perfect credit score – which people only want if they want to borrow more money.
Comments are closed.