Increased interest charges When DMP is right choice
Summary: Increased interest charges - This paper argues that when interest rates increase on card debts, that a Debt Management Plan (DMP) may be necessary to cope with the increased repayment level or repayment period.
We all know that simply making minimum repayment on credit or store cards or catalogues, means that at best , the debt will take a very long time to clear, and at worst we will never clear it. We are encouraged by the creditors themselves to make more than minimum repayments in order to see debts reduce. However for many of us this is simply not affordable. We argue that at least the debt is under control, we are not missing payments and the creditors are being kept happy.
Reading creditor statements and letters
Let's be honest - the monthly statement arrives or a letter appears that looks incredibly dull and not specific to us, and we bin them or file them away with scarcely a second glance. However at some point the fact that we are paying good money and maintaining all debt repayments and yet the debt is scarcely reducing hits us. Somewhere along the line our creditor informed us of an interest rate rise. These of course can be devastating. We may have started with an interest-free deal, then it ended and interest kicked in, now the rate has dramatically increased and we understand at the rate we are going, the debt will never be cleared.
The problem of a perfect credit score
For many people making the minimum payment on debts is their first priority after being paid. Such regular payments means our credit score is high. We may have access to more credit - and we may need it because after making minimum payments we don't have quite enough to live on. But due to high interest rates the debt is actually increasing! It's a double whammy - making payments we can't afford and the debt is not even reducing.
Can a DMP help?
If we find ourselves in the kind of vicious circle described above, it's important we take professional debt advice to find out the options open to us. It may well be that a DMP is the solution we need. Very often creditors will agree to freeze interest charges allowing the debtor to make an affordable payment which is coming off the capital owed rather than just servicing the interest. Creditors are not legally obliged to stop adding interest - as they are in an IVA, but not everyone qualifies for an IVA, and a DMP may be a much better solution for them.