For people struggling with debt, a Debt Management Plan (DMP) can really be an effective way for them to become debt-free.
However, just all other debt solutions, a DMP also has some pitfalls that you need to be aware of. One of these pitfalls is the detrimental effect it has on your credit score.
In this post, I’ll be discussing how a DMP is logged in your credit report, how long it stays there and how that will affect your finances as well as your day-to-day life.
What is a Credit Report and What Does My Credit Score Represent?
Your credit report (or credit file) is a record of the financial dealings you have done in the past.
It has details regarding any debts you owe as well as what your payments have been like towards those debts.
If you happen to miss your debt repayments or pay them late, then this information gets recorded within your credit file as well.
Depending on how well you manage your finances and how punctual you are with your payments, your credit rating will either be high or low.
Your credit rating is basically an estimate of how responsible you are in your financial dealings.
Whenever you apply for credit, lenders will look up your credit file in order to get an estimate of the risk that you pose. Obviously, if your credit rating is high, you’ll have a higher chance of getting approved for credit. However, if it’s low, then you’ll have a much lower chance of getting approved.
Lenders aren’t the only ones that look up your credit file when trying to decide whether to approve you for credit or not. In fact, your credit report can come into play in many different areas of life.
For example, if you’re looking to rent a space, then your potential landlord might look up your credit file as well in order to get an estimate of how financially responsible.
Similarly, you may also be subject to a background credit check when applying for a mobile phone contract.
As you can probably imagine, having a poor credit rating can cause many difficulties for you in many different facets of your life.
Who Maintains Credit Files?
Your record is maintained and updated by credit reference agencies operating in the UK.
So, What Effect Does a DMP Have on My Credit Rating?
Most debt solutions including a DMP can have an immensely negative impact on your credit rating.
A DMP gets recorded within your credit file and it shows the fact that you’re paying less than the originally agreed amount since that’s how DMPs work.
Of course, if you’ve entered into any type of debt solution, lenders will perceive you as a high-risk candidate and thus, your chances of getting approved for any type of loans or credit will go down dramatically.
Thus, if you apply for credit while a DMP is present within your credit record, then lenders may instantly reject your application.
Even if you get approved for credit, you may be charged extremely high interest rates and you also may not be able to get approved for as high a loan amount as you wanted.
How Long will My DMP Stay on My Credit Report?
Since DMPs are an informal debt solution, they are not recorded as separate entries within your credit report but rather, they’re recorded as entries that you already had for the original debt.
Debts stay within your credit report for six years. If your debt payments last longer than six years, then the debt is removed from your file once it is paid off.
It’s important to note that while a DMP is not recorded as a separate entry, your creditors need to add a “DMP” marker alongside the debt entries that are a part of your DMP.
This will act to provide this information to anyone who is looking at your credit report and it will be clear to them that you’re making reduced payments to your debts as part of an agreed-upon plan.
Is it Possible to Get a Loan with a DMP?
While it’s definitely possible, I would advise against it unless it’s an absolute emergency.
Even if you are able to find a lender who approves you for a loan, they will most likely charge you a very high interest rate. Thus, you’ll end up paying back a lot more than the original loan amount.
Furthermore, obtaining a loan while you’re in a DMP may cause your credit rating to go down even more.
I highly advise that if you can afford to wait, you should definitely do so before obtaining a loan.
Wait for your DMP to end, spend a few months or even a couple of years rebuilding your credit rating and then apply for a loan.
Not only will you be able to secure the loan much more easily but you’ll also be able to find it a competitive interest rate.
When you’re applying for a loan, make sure that the lender is authorised and regulated by the Financial Conduct Authority (FCA).
Furthermore, you should choose one lender and only make one application to that single lender.
This is because when you apply to a lender, they perform a credit check which gets logged within your credit record.
If you apply to many lenders at once, several of these entries will get logged within your record.
Having several such entries in your record will cause your credit rating to go down and will make lenders very apprehensive about giving any type of loan to you.
While a DMP is a great solution that can help you pay off debts to creditors in a manageable way, it does have some risks which you need to be aware of.
Make sure to take your credit rating into account when you’re applying for a DMP.
I hope you found this information useful. Let me know if you have any further questions.