What’s the difference between debt management and debt consolidation? We explain what both of these are and how they are different – but also how they are more similar than you might realise. 

If you’re considering a Debt Management Plan or debt consolidation, you need to read this first. 

What is a Debt Management Plan?

A Debt Management Plan (DMP) is an informal debt solution for people who are struggling to repay non-priority debts. A non-priority debt includes debts relating to credit cards, store cards and personal loans. The DMP is an agreement that the debtor will make a single monthly payment which is then divided up and sent to each of the creditors. How much of the payment goes to each creditor will be decided at the start, usually calculated on a proportional basis. 

It’s important to note that a DMP is not a legally binding debt solution. At any time, creditors or the debtor can decide to stop the arrangement, but this doesn’t stop the debt being owed. If you want more information about DMPs, read our complete DMP guide for free. 

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What are debt management programmes?

A debt management programme is another term used to describe a Debt Management Plan. However, this term may also be used by commercial debt management companies and credit counselling businesses, referring to paid-for services they offer to help you get out of debt. 

What is debt consolidation?

Debt consolidation is when an individual streamlines their debt repayments by reducing the number of creditors they owe. It works by taking out new credit to pay back multiple existing debts. For example, you might decide to take out a debt consolidation personal loan and use the loan to pay off multiple unsecured debts. Thus, you move all or many of your debts into one new debt. 

The amount you owe is still the same, but you can make it somewhat cheaper by finding a debt consolidation loan with a lower interest rate compared to the interest rates you’re paying on existing credit cards and loans. By now having fewer or just one monthly payment, it is easier to manage your money and improve your financial situation. 

A debt consolidation loan is not the only way to access a lump sum to consolidate debt. You can also achieve debt consolidation by using a balance transfer credit card where balances from multiple credit cards are moved to the new credit card. This is only applicable to consolidating credit card debt. Homeowners could consider consolidating debts through remortgaging to release home equity. 

And there’s one other way… do you know what it is already? 

What’s the difference between a Debt Management Plan and debt consolidation?

A Debt Management Plan is one of the ways you can consolidate debt. If debt consolidation is the overarching strategy, then a Debt Management Plan is one of the methods to achieve debt consolidation, along with debt consolidation loans, balance transfer credit cards and debt consolidation remortgages. 

However, there are some key differences between using a DMP for debt consolidation and the other three common methods. Whereas a debt consolidation loan, a balance transfer card and remortgaging for debt consolidation all actually pay off debts so you have fewer creditors, a DMP does not. 

When you use a DMP, you still have just as many creditors as you did before the DMP began. You might only make one monthly payment now, but this hasn’t technically consolidated debts in the same way as the other methods. You still owe multiple creditors, and any of them could decide they do not want to be a part of the DMP before because it is not a legally binding debt solution. 

Nevertheless, it can still be a beneficial alternative, especially if you are unable to access a debt consolidation loan due to a poor credit score.

How can they affect my credit score?

If you enter into a Debt Management Plan, there’s a good chance that the DMP will negatively affect your credit score. DMPs are not directly reported onto the credit score, but a DMP will be flagged with any smaller repayments. 

Your score can be negatively affected because you’ll be paying less back each month than what was originally agreed with each creditor. Experian has explained that those creditors are still within their right to record a default on your credit score while you make reduced payments. However, you might be able to negotiate with the creditors to not do this when you discuss your DMP. Any payment defaults will be visible on your file for six years and then automatically removed.  

Taking out a debt consolidation loan will not affect your credit score, but you will have your credit file checked before being approved for the loan. This will leave a hard search on your file with negligible effect. The same is true if you were to apply for a balance transfer credit card. If you missed any repayments in full you could have a default registered on your file just as described above. 

Debt consolidation vs debt settlement

Debt consolidation is moving all your debts together, whereas debt settlement is offering creditors an amount to settle your debts in one payment, usually less than the value of the debt to save the debtor money. 

You might be able to combine these methods together. If you’re using new credit to pay off smaller debts, you could save by getting these creditors to wipe some of your debt for immediate repayment in full. Be aware that debt settlement will affect your credit score and may not be worth the additional savings. Joining these strategies together should be done with caution. 

Access free debt advice first!

If you’re not sure which of the debt consolidation methods is best for you, or if debt consolidation is even the most advantageous solution, speak with a UK debt charity. They can offer you free professional advice to support your escape from debts.

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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