Debt Management Plans (DMPs) And Your Credit Score

If you’re struggling to meet regular repayments, a debt management plan (DMP) can take some of the pressure off. But it can also make it hard to borrow money from lenders.  Nevertheless, a well-managed DMP can help you get your finances back on track, and improve your credit profile in the long run.

What is a Debt Management Plan?

A DMP is an agreement that can be made between you and your creditors (people you owe money to) if you’re unable to make payments on time. It allows you to pay a smaller amount each month than originally agreed. You’ll still have to pay off all your debt, but you can do it more slowly.

Debt Management Plan Approval

Being approved for a DMP depends more on your disposable income than the amount of debt you have (your disposable income is the money you have left over after paying living costs, such as rent, food, and energy bills).

To get a DMP, you’ll usually need to:

• Have disposable income to make reduced monthly payments.
• Be able to make large enough payments that you can clear your debts in a reasonable amount of time (Refresh can advise on how long this will be)
• Not have enough disposable income to completely repay your debts within six months.

What types of debt can be included in a DMP?

Only ‘non-priority’ debts can be included in a debt management plan, such as;

• Bank loans
• Credit cards
• Student loans
• Water bills
• Benefits overpayments

Debts that can’t be included in your DMP are called ‘priority’ debts because there are more serious consequences for not paying them. These include;

• Mortgages
• Overdue payments for rent, gas, electricity, council tax, or child support
• Magistrates’ court fine
• Overdue income tax or VAT
• TV licence fees

Debt Management Plan Setup

To set up a DMP, your creditors must agree to it. It may be in their best interests, as ultimately it will help lenders get their money back. Speak to our team who can help

A DMP isn’t legally binding, so it can be cancelled at any time by either you or your creditors. Refresh will give you debt advice, deal with creditors, and calculate your payments.

Once you start your DMP, you’ll only have to make one payment each month to cover all debts included in the plan. Your provider will split this money between your creditors. You’ll continue to make these payments until either your debts are cleared or you’re able to make the full, original payments again.

The Benefits of a Debt Management Plan

A debt management plan may benefit your personal and financial life by;

• Reducing stress. It can be relieving to have lower, simpler payments, and someone to deal with your creditors for you.
• Protecting you. Creditors who agree to your DMP are less likely to take legal action against you to get their money back since they know you’re trying to sort out your debt.
• Getting you back on track. A DMP can help you clear your debts and improve your financial situation in the long term

It’s also important to be aware of the downsides such as;

• A DMP can reduce your credit rating. However, in the long run, it can be better for your score than getting into serious financial difficulty with lenders.
• You can get a default. Even if a creditor has agreed to your DMP, they may record a default on your credit report since you’re making reduced payments.
• You may pay more interest. However, lenders will sometimes agree to freeze interest rates and charges during your DMP

How long does a DMP stay on your credit file?

Debts will stay on your report for six years, starting from the date they’re paid off or defaulted.
Note that your DMP will not be recorded as a separate entry on your report. However, creditors could add a DMP ‘flag’ to your account entries. This reassures anyone looking at your report that you’re making reduced payments as part of a plan.

How to improve your credit score after a DMP?

When your DMP ends, you can close the accounts you’ve paid off, or start making full payments again. Your score should recover over time if you continue to meet all repayments. Records of your debts will take six years to drop off your report, but lenders may pay less attention to them as they age.

Struggling to make monthly repayments?

We have over 14 years’ experience. No matter what your situation is you can be guaranteed we have dealt with something similar before. We are experienced, trustworthy, and most importantly, approachable.

We can help you regain control of your finances by providing advice, support, and a debt solution that allows you to repay your debts at a rate you can afford. Speak to our team today. Freephone 0800 121 48 63