Debt Management Plan and my credit rating

Summary: This paper looks at the effect of starting a Debt Management Plan (DMP) on an individual's credit rating and the likely effect on obtaining future credit.

Breaking a contractual agreement

Anything other than meeting minimum or agreed payments on debts on time will have a negative impact on an individual's credit rating. The only way to maintain a high credit score is to ensure all obligations are met and on time. However there are times when this is simply not possible or practical. For a short or long term it may be necessary to look to a DMP to make affordable repayments on unsecured debts.

How does a DMP damage my credit rating?

When a payment is made on a debt that is less than the minimum required then it can be noted on your credit file that this has happened and your credit score adjusted accordingly. Creditors may vary in the speed at which they inform the credit agencies. Over a period of time, this may result in multiple entries of less than contractual repayments on debts.

Do I need a good credit rating?

Well - they are useful! Financing a house, a car, a mobile phone etc will be a great deal easier (or made possible) with a good credit rating. On the other hand, many people have chosen to avoid most or all forms of credit and are unconcerned about their poor credit rating. Furthermore someone may have a very good credit score but still find it difficult to obtain further credit, simply due to the existence of the debts on their credit file (even though they are up to date with all repayments).

Will a DMP ruin my credit rating forever?

In a word - no. If a creditor issues a default notice (a formal letter) then it stays on your credit file for 6 years. Once the debts are cleared, it is perfectly possible to rebuild your credit rating by a sensible use of credit, being on the electoral roll etc. There is no reason why being on a DMP in the past will have any impact on your credit application in the future.