Does a Debt Management Plan affect Credit Rating?

Does a Debt Management Plan affect Credit Rating?

Having amassed more debt than you can comfortably repay, it may be time to consider repayment options such as a debt management plan or DMP. In the right circumstances, paying back debts under this plan can prove to be a comfortable, long-term solution.

However, you may be asking yourself, does a debt management plan affect credit rating? Let’s look into this in more detail.

What Is a Debt Management Plan?

A debt management plan is a non-binding arrangement made between a lender and a borrower to repay unsecured debts such as credit cards, overdrafts, or personal loans. This is done by consolidating all of these debts, then negotiating a more economical monthly payment over a longer period. Unlike other debt repayment plans, DMPs guarantee repayment in full.

Does a Debt Management Plan affect Credit Rating?

When deciding whether a DMP is your best option, does a debt management plan affect credit rating should be one of your first questions. A DMP will have a negative effect on credit rating, due to the nature of the plan.

Under a DMP, debtors make low monthly payments. Although this is beneficial as it guarantees affordability, it’s a reduction of the payment initially promised to creditors. As an informal arrangement, this won’t be noted on public records, but it will appear on a personal credit report, thus lowering one’s credit rating.

Whether you hope to access a mortgage or bank loan during your DMP is a pertinent issue to determine how does a debt management plan affect credit rating. Having low credit and making payments through a DMP will affect your ability to access loans or lines of credit.

DMP markers stay on credit reports for six years. These markers are indicators to potential creditors that you may struggle to repay debts under the agreed terms, and are therefore a liability. As a result, creditors will either reject your application or offer their services with inflated interest rates.

Credit issues are further exacerbated by late or missed payments. For this reason, it’s generally advised to wait until the end of a debt management plan to apply for credit cards or mortgages, because applying for them during a DMP is significantly more difficult.

Improving Credit Rating after Having a Debt Management Plan

Finding out that a debt management plan does affect credit rating negatively is discouraging. Yet despite the challenges, a debt management plan is not a death sentence to your finances. In fact, it’s best to look at the effects of a DMP as short-term obstacles on the road to long-term financial success.

As previously mentioned, DMP markers remain on one’s credit report for six years, making it difficult to gain approval for credit cards or mortgages during or immediately after a DMP. However, it’s possible to slowly rebuild your credit rating. First, by making timely, consistent payments during your DMP. Then taking the same approach to bills and small amounts of credit once the DMP has ended.

To the question does a debt management plan affect credit rating, the answer is yes. However, these effects are not permanent and should not prevent you from considering it. Working to rectify your low credit having repaid your debts can put you on track for financial stability.

How Irwin Insolvency Can Help

If you have unsecured debt and believe that a debt management plan may be the ideal solution, our team at Irwin Insolvency can help. At Irwin Insolvency, we have the expertise to negotiate debt management plans that will get your finances back on track.

Contact Irwin Insolvency today or dial 0800 254 5122 for more information.