Debt Management Plans – Option For Paying Off Your Debt
If you’re finding it a struggle to keep up with credit cards, loans or store cards, a debt management plan (DMP) may be right for you.
This guide explains what a DMP is, how it works, if it might be suitable, and how to get one.
What is a DMP?
A Debt Management Plan (DMP) allows you to pay off your non-priority debts at a rate you can afford. Non-priority debts are things like credit cards, loans and store cards.
With a DMP you make reduced monthly payments towards your debts to your creditors, to repay your debts.
A DMP is not legally binding, meaning you’re not tied in for a minimum period and can cancel it at any time. However as it is an informal debt plan creditors can still take legal action against you to recover the debt.
Many debt management companies provide DMPs, but most charge a fee. StepChange offer DMPs with no set-up charges or monthly fees.
How does a DMP work?
A debt management plan is arranged through a DMP provider who deals with the creditors on your behalf. Your DMP provider will help you work out an affordable payment plan and talk to your creditors.
You make one monthly payment to the DMP provider who then pays your creditors for you.
Which debts can I pay off with a DMP?
You can only use a Debt Management Plan for non-priority debts:
- Personal loans
- credit card, store card debts or payday loans
- catalogue, home credit or in-store credit debts.
- bank or building society loans
- money borrowed from friends or family
How to get a DMP
If you’ve decided a DMP is right for you, you’ll need to choose a DMP provider. Choose a fee free DMP company to ensure your money goes towards your debt on not fees.
Check the DMP provider is authorised by the Financial Conduct Authority (FCA). You can check by entering their name or postcode online
It’s also a good idea to find out what happens if your circumstances change and you need to cancel or change your plan? Is there a fee associated with that?
How will a DMP impact me?
- You’ll be repaying your creditors less than your contractual payments each month so your credit rating will be affected.
- it will take longer to pay back your debt because you’ll be paying less each month
- your creditors won’t necessarily freeze the interest and charges on your debts, so the amount you owe might go down by less than you think
- your DMP provider might charge you a fee, although there are several free providers you can use so there’s no need to pay if you don’t want to.
- your creditors might refuse to co-operate or continue to contact you
Is a DMP right for me?
A DMP may be a good option if the following apply to you:
- You’re struggling to keep up with your credit cards or loans.
- You can afford the monthly repayments on your priority debts (such as mortgage, rent and council tax) and your living costs.
- You have some money left over each month after you have paid your priority debts and living costs.
- You’d like someone to deal with your creditors for you.
How will a DMP affect my credit score?
Your credit score is a reflection of your chance of getting approved for credit. Your chances of getting credit are higher the higher your credit score is.
Getting a DMP will usually lower your credit score. You will be paying back less than you originally agreed to, which will be shown on your credit report. Lenders will likely see you as high-risk due to making reduced regular payments which show you are having difficulty repaying what you owe.
If you apply to borrow money while you’re on a DMP, lenders may reject your application or if they do agree to give you credit will charge you higher interest rates.
How long does a DMP stay on your credit file?
All debts remain on your report for six years, starting from the date they are paid off or defaulted.
Having a DMP means you will be paying off your debts more slowly, so they will remain on your report for longer, thus negatively impacting your score for longer.
Creditors should add a DMP ‘flag’ to your account entries. This reassures anyone looking at your report that you are making reduced payments as part of a plan.
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.
Get free debt advice about a DMP
It is important to get expert debt advice before you decide to take out a Debt Management Plan. The best debt solution for you depends on your personal circumstances.
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