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 – this can affect your lifestyle and limit your options. 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.

Who can get a DMP?

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 (your DMP provider will advise you on how long this is)
  • 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 fines
  • Overdue income tax or VAT
  • TV licence fees

How does a Debt Management Plan work?

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

A DMP isn’t legally binding, so it can be cancelled at any time by either you or your creditors. You may use a DMP provider who’ll 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.

How will a DMP affect my life?

A debt management program 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.

There are some down-sides to getting a DMP. You may find they’re outweighed by the benefits, but it’s important to be aware of them:

  • You may pay more interest. Creditors typically charge daily, monthly or yearly interest on your debts. So, because you’re repaying them over a longer period, you may pay more interest overall. However, lenders will sometimes agree to freeze interest rates and charges during your DMP.
  • A DMP can reduce your credit rating. However, in the long run, it can be better for your score than getting into more serious 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.
  • Some DMP providers charge a fee. But there are several free providers you can use, such as StepChange and PayPlan.
  • Some creditors may still contact you If you’re struggling to pay off priority debts, you’ll have to deal with these lenders directly.

Will a DMP affect my spouse or partner?

Any non-priority debts that you share with your spouse or partner can be included in your DMP. However, your creditors may still contact them. So, you may want to consider setting up a joint DMP. You can do this even if your partner earns a different amount, or if they have other debts that aren’t shared with you.

Learn more about financial association or you can find out if you share debts with your partner by getting your credit report. Simply check the ‘financial associates’ section for their name.

How will a DMP affect my credit score?

Your credit score reflects your chances of getting approved for credit. The higher it is, the better your chances. Lenders calculate your score when you apply for credit, using your credit report, application details and any other information they hold on you (e.g. if you’re an existing customer).

Getting a DMP will usually lower your credit score. This is because you’ll be paying less than the originally agreed amount, which will be shown on your credit report. Reduced payments show you’re having difficulty repaying what you owe, so lenders may see you as high-risk. So, if you apply to borrow money while you’re on a DMP, lenders may reject your application or charge you higher interest rates.

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. A DMP means you’ll repay your debts more slowly, so your score may be negatively impacted for longer.

Note that your DMP will not be recorded as a separate entry on your report. However, creditors should 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.

Can I still borrow money if I have a DMP?

It’s possible to get credit when you have a low score, although your options will usually have low limits and high interest rates. However, the terms of your DMP may mean you can’t borrow more money until you finish the plan. If you’re allowed to apply for credit, you should ensure you can afford the repayments.

You may struggle to get a mortgage while on a DMP. If you already own property, you might consider re-mortgaging to help pay off your debt. This can be difficult with a low credit score, but explaining your situation to lenders may help.

How can I improve my 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.

In the meantime, there are several things you can do to improve your Experian Credit Score. It’s also helpful to check your Experian Credit Report regularly for accuracy, and to see what’s impacting your score.

Speaking to debt charities

If you’re struggling with repayments, you may be approached by companies promising to help you wipe out your debt. Be cautious. They may charge you hefty fees, and it’s possible to end up with even more debt and/or a damaged credit report.

Getting support from a reputable, non-profit organisation is usually a much safer option. Examples are StepChange and National Debt Line. These charities can advise you on ways to deal with debt, such as a debt management plan or an Individual Voluntary Arrangement, both of which will probably have a negative impact on your report and score.