Credit Rating and a Debt Management Plan
Your credit rating will be affected if you start a Debt Management Plan. This is the case even if your creditors agree your reduced payments.
- Why does a DMP affect your credit rating?
- How long will your credit rating be affected?
- What types of credit can be used during the Plan?
- Can you Remortgage during a DMP?
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Why does a DMP negatively affect your Credit Rating?
Even if your creditors agree to your Debt Management Plan (DMP) it will negatively affect your credit rating in a number of ways. Firstly that fact that you are making reduced payments will be marked on your credit file each month.
This situation then becomes visible to anyone carrying out a credit check against you. It implies you cannot afford the contractual payments to your current debts. As a result they will normally reject your application for more credit.
In addition the creditors involved in your Plan will often issue a formal Default against you. This will also be recorded on your file. Most high Street lenders will not want to lend to you when they see a Default.
Although it is an informal agreement the major credit reference agencies are now starting to record the existence of the actual DMP itself on credit files.
How long will your Credit Rating be affected by a DMP?
Once you start a DMP the general rule is that your credit rating will remain poor until you have completed the Plan. In other words it will not start to improve until you have repaid or settled all of your debts in full.
The exception is if a creditor issues a Default against you. This could mean your credit rating starts to improve sooner. The reason is that the record of the Default and the account itself must be deleted from your credit file after 6 years.
If all your accounts are defaulted your credit rating will start to improve automatically 6 years from the default date. After this there will be no negative record remaining on your credit file.
If you repay or settle a defaulted account the record still remains on your file for the full 6 years. As such paying off defaulted debt early will not necessarily improve your credit rating.
What types of credit can you use during a Debt Management Plan?
If you already have a mobile phone on contract this will not be affected if you start a DMP. You can continue to use your phone as long as you maintain the monthly repayments. The same goes for your other household utility bills.
However your poor credit rating will normally prevent you from taking out new credit agreements. You may struggle to get a new mobile contract with a different provider. In addition high street lenders will normally reject credit applications.
You may still be able to borrow from a doorstep lender or Payday loan company. However you should think very carefully before doing this. Borrowing more during your Plan could put the whole agreement at risk.
If you have a financial emergency while you are in a DMP you should consider taking a payment break from your Plan. This would allow you to save the money you need.
Can you Remortgage during a Debt Management Plan?
If you are a home owner starting a DMP will generally not affect your property as long as you keep up your mortgage payments. You should include sufficient cash to do this as part of your living expenses budget.
However what if you want to remortgage? You may have come to the end of your fixed rate mortgage deal and need to look for something cheaper. Alternatively you may want to release equity from your property to settle debt.
It is possible to remortgage during a DMP. However you will need to be able to prove that you have maintained your Plan payments on time for the past 24 months. In addition your credit rating must have become no worse.
If you remortgage during a DMP the interest you pay will usually increase and your monthly mortgage repayments will rise.
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