Will entering into a DMP damage my credit rating?

Dear James,

If I get a debt management firm to contact my credit card and loan providers to negotiate debt reduction will this affect my credit rating and future loan requests? I appear to have a good credit rating as I am never refused credit.

Anne, Harlow

Dear Anne,

A debt management plan (DMP) is an informal arrangement between a borrower and their creditors to repay outstanding debt. DMPs are often administered by a third party, typically a not-for-profit provider such as PayplanStepChange Debt Charity or Christians Against Poverty or a commercial company that will charge you a fee for setting up and managing your plan. A plan can involve repaying all or part of your debt to any particular lender and in some cases interested can be frozen. For many people contemplating a DMP to repay their debts, regaining control of their finances will be their top priority, not their credit rating. However, it’s still worth taking a moment to understand what the impact of a DMP might be on future credit decisions. You might be surprised to learn that DMPs aren’t themselves added to credit reports, simply because there is no central source of information on DMPs that credit reference agencies like Experian can use. However, any accounts registered on your report and included in your DMP should be appended with a DMP flag, to make it clear you’re repaying those debts through an agreed plan. Reduced or missed payments will affect the repayment codes registered on your report each month as these reflect your original repayment schedule. But once your DMP ends, the accounts should either be marked as closed or returned to good order if you keep them open. Lenders will be able see that you took positive action to sort out your debts. Furthermore, as time passes, any previous missed payments may be overshadowed by more recent positive information. And after six years any adverse information should drop off your report altogether. There’s a little more detail on some of these points in this Payplan blog. The important issue really is making sure you choose the most appropriate mechanism to repay your debts as quickly as possible to help you regain control of your finances. You can get impartial advice on this from a number of organisations, including those mentioned above. (March 2013)

James
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