For How Long Will a Debt Management Plan Affect your Credit Rating?

It’s hardly controversial to suggest that the UK has a problem with unsecured debt, especially in the form of credit cards and loans.

On average, it’s estimated that the average UK household owes £15,385 to credit card firms and other unsecured lenders, with many struggling to make regular repayments or eat into the significant rates of interest incurred.

In some cases, it may be wise to negotiate a debt management plan with your creditors in a bid to take control of your repayments, but this can have a detrimental impact on your credit score. We’ll explore this further below, whilst asking how this type of arrangement works.

What is a Debt Management Plan? 

In layman’s terms, a debt management plan is a formal agreement that can be made between you and your creditors, in instances where you’re unable to make regular repayments on time.

Not only does this enable you to get a hold of your repayments, but in most cases it creates a scenario where you can reduce the amount payable each month.

More specifically, creditors may decide to forego some or all of the interest that’s owed, making it easier for you to focus on repaying the value of your debt over a manageable period of time.

How Does a Debt Management Plan Work?

To establish a debt management payment, it’s imperative that your creditors agree to the precise terms on the understanding that it will help them to get their money back quicker.

This type of agreement will continue for as long as you continue to make the approved payments, although as it isn’t a legally binding agreement it can be cancelled at any time by any of the parties involved.

Typically, a debt management plan will require you to make a single, consolidated payment each month to cover the individual liabilities included in the agreement. This cash amount will then be distributed as agreed between the participating creditors, and can be used to cover non-priority debts such as credit cards, bank loans, student loans and water bills.

Conversely, priority-debts cannot be included in a formal debt management plan, which means that mortgages, magistrates’ court fines, TV license fees and overdue income tax payments must be dealt with separately.

Who’s Eligible for a Debt Management Plan and What Impact can it Have?

In order to qualify for a debt management plan, you’ll need to meet certain criteria outlined by the lender.

The single most important metric is your amount of disposable income, which can be calculated by subtracting your living costs from the total earnings that you receive each month.

In simple terms, you’ll need to have the necessary disposable income to make even reduced repayments, as creditors will want to ensure that you’re able to settle individual debts in a reasonable amount of time.

However, you won’t qualify for a debt management plan if you have too much money in savings or disposable income, and more specifically if you can realistically settle your existing debts in six months or less.

Now, whilst a debt management program can help to reduce stress and protect you from the threat of creditors taking legal action to recoup your debt, there are also some potential downsides to entering into this type of agreement.

For example, a debt management plan can freeze your credit rating for an extended period of time. So, whilst debts typically remain on your credit file for a period of six years, this may be extended if you enter into an agreement that causes you to settle your liabilities at a slower pace.

This does not mean that you will automatically be given a bad credit score, however it does mean that you will not be able to improve your credit rating whilst you are going through the debt management plan.

In this respect, debt management plans represent a long-term money-management strategy, which may require you to compromise your credit score in the short-term in order to get a handle on your debts and qualify for finance in the future.