A debt management plan (DMP) is a good debt solution for many people. If you are trying to decide whether you need one, you may want to know how bad the effect will be on your credit file, and how long it will be before your credit rating recovers. There isn’t a simple answer however:
- DMPs are used in a lot of different situations;
- because they are “informal” arrangements creditors don’t all have to respond in the same way;
- each future lender does their own credit assessment and these may give different weights to parts of your credit history.
This article looks at what may be recorded on your credit file in a DMP, how lenders tend to view these and some scenarios so you can see which bits are likely to matter most for you. At the end I look at whether any of the alternatives to a DMP might be better for your credit rating.
It also applies to payment arrangments, which have the same effect on your credit record as a DMP.
How important is your credit rating?
On one level, not very! If you need a DMP, you can’t manage the normal debt repayments and there is no debt solution that will let you pay less and keep a good credit record.
Finding the right debt option for you and your family so you can clear your debts is the key to your financial future. Your credit rating is only a very small piece of this bigger picture. So don’t let worries about your credit rating stop you from making the right debt decision.
How missed payments affect your credit record
You may think if you miss a loan payment or pay less than the minimum on your credit card this is a “default”, but this is not how it is described on your credit report at the start.
Six years of payments are shown on your credit record, with the most recent first. When you first miss a payment, the current month’s payment is marked as being one month late. Then if you miss the next month, the first month is shown as being two months late and the recent month is shown as being one month late.
A Default is a special marker that your creditor adds to your debt record. It is usually added when the account is between 3 and 6 months in arrears.
What difference does a DMP make?
In a DMP you offer a reduced payment to each creditor and ask them to freeze interest and charges. Creditors do not have to accept this offer – they are more likely to do so if you say why you have financial problems and send them details of your Income & Expenditure to show you can’t afford the usual payments. If you are using a DMP firm, the firm will send these details to the creditors.
A creditor often accepts a DMP offer, to be reviewed after six months or a year. Here, even though your creditor has accepted your offer, it is expected that the debt will revert back to the original terms at some point. Arrears are calculated against the original terms however, so your credit record will continue to show that you are getting behind with the agreement, even if you are making these agreed lower payments. It will also show that an Arrangement to Pay (AP) is in place.
If you keep up with the agreed reduced payments your account may not be defaulted, but if you miss a payment or if the arrears get to be large it may be. So you can get a default if you are more than 3 months in arrears compared to what your original payments were, but some lenders will just carry on with AP markers.
Defaults fall off after 6 years
A debt marked as Defaulted will drop off your credit history six years after the date of the Default. It doesn’t matter if you have repaid the debt, are still paying it or have stopped making any payments, the debt will still disappear.
After a defaulted debt falls off, it will never come back. However it still exists, see Must I pay a debt that’s not on my credit file? for details.
How do future lenders view DMPs?
It’s hard to generalise as each lender has their own method of credit scoring, but most people would agree with the following:
- creditors don’t like Defaults. They would prefer to see an Arrangement to Pay (AP) in your history rather than a Default. This post on a MoneySavingExpert forum has detailed examples that show one person’s experience of the ways different creditors and different credit reference agencies report and react to APs.
- creditors care more about recent events. Anything which has happened in the last year or two is much more important than four or five years ago. Whatever is wrong with your credit history, time is a great healer.
- the amount of debt you have is also important – if you owe too much you won’t get offered more debt even with a great credit record! So a DMP that helps you pay down your debt is in the long-term going to be a good thing.
Some DMP scenarios
Those generalisations may not seem much help to you. So let’s look at some possible scenarios:
(A) temporary DMP with a Default
Perhaps you were without any income for a year because of redundancy or sickness. During this time you set up a DMP making token payments but at least one of your creditors Defaulted your account. At the end of the DMP you go back to making the usual payments. Here your credit rating will start to improve, but the Default is going to put a lot of creditors off. You can add a note to your credit file explaining the cause of the default, but you may struggle to get a mortgage at a good rate until the default has dropped off after 6 years.
(B) DMP completed after four years
This could occur if you were making significant payments to your debts, but not the full amount. Your creditors accepted your offer, froze interest and didn’t Default your accounts. After 4 years, your debts will be marked as Settled and from here your credit report starts to improve but the payments history will still show the DMP for 6 years from when it was completed.
You probably aren’t going to get a mortgage offer for two or three years, but after that it should be fine (assuming of course that you have a good deposit and pass the affordability checks for what you want to borrow). Even if you have defaults on your credit record, if the default date is over 3 years ago and the debt is now repaid, you will probably be able to get a mortgage.
(C) Eight years into a DMP, four still to go
Sometimes DMPs can drag on for ages – at the start you were making reasonable payments, but had to reduce these when your pay was frozen for a few years and your bills kept going up, then your child tax credits were cut etc. Many of your debts were probably marked as Defaulted and already they will have dropped off, but if some weren’t they will show until the end of your DMP when the debts are settled and then for six years afterwards. However, you may be able to improve this by asking your creditors to add back-dated defaults, see What should the default date for a debt be? for details about how to do this.
DMP alternatives and credit reports
Would any of the alternatives to a DMP have been better from the credit rating point of view? Debt Relief Orders, IVAs and Bankruptcy are forms of insolvency and all have the same effect on your credit rating: a notice is placed on your credit record and all debts that haven’t previously defaulted will have a default date of the start of your insolvency, dropping off after six years. After the defaults have dropped off, most people who have chosen one of these three options then struggle to rebuild their credit record for several years, often finding it difficult to open bank accounts and having to get bad-credit cards such as Vanquis to try to rebuild a good credit rating.
Going for one of these insolvency options would not have been a sensible alternative to the temporary DMP in scenario (A). One of three would almost certainly have been better than the long DMP in scenario (C), although here the credit rating problem is just a minor side-effect of being stuck with unmanageable debt for far too long.
The interesting case is (B) where the DMP lasted 4 years but the footprint remains on the credit file for a further 6 years – is this ageing trace of a DMP more or less damaging than having gone insolvent? I think most people would say that the DMP is preferable from the credit rating point of view.
The other possible alternative to a DMP is selling assets, usually a house with equity. From the credit record point of view, this leaves you with a great rating! If you do have assets and are looking at a lengthy DMP, it may be better to take the tough decision to sell the house.
What about getting a mortgage?
Your credit record matters when you are applying for a mortgage, but so does having debts – see Can I get a mortgage in a DMP? for more details.
Conclusion
If your DMP is going to be temporary and you expect to be able to start making the usual monthly payments to your debts, or if you will be able to clear all your debts in a DMP within a reasonable number of years, then you shouldn’t worry about the effect the DMP has on your credit rating – it won’t be great but there aren’t any better alternatives.
If your DMP is going to be very prolonged, then you should probably be looking at the alternatives. Not only will they let your credit file recover more quickly, but they will give greater certainty over the process.
An overview of possible debt solutions
What should the default date be for a debt?
Credit score problems and questions
Luke says
I’ve read you only get the ‘paid in full’ marker on your account if you’ve paid the whole debt and interest occured with it. Being in a debt management plan freezes all interest charges therefore I’m thinking regardless of my plan of action now whether I part settle all the debts or pay in full the balance remaining, I’m not going to get that ‘paid in full’ marker? If I paid the rememaining balance in full now would it still be marked as ‘settled for less’ because the interest has been frozen therefore the original contract with the lenders technically hasn’t been paid in full?
If that’s the case then it might be ideal to go with the part settlements with the creditors and save myself some money seeing as either option ends with the same result.
Sara (Debt Camel) says
If I paid the remaining balance in full now would it still be marked as ‘settled for less’ because the interest has been frozen therefore the original contract with the lenders technically hasn’t been paid in full?
No, that isn’t the way this works. If interest has been stopped on a debt because of your DMP, then it is not included in your balance. If you repay the balance in full, it will not have a partial settlement marker added to it.
BUT your credit record is already poor because of the DMP. So saving yourself some money may be an excellent idea as there is often little difference between “paid in full” and “paid partially”.
How many of your DMP debts have defaults added? what is the date of these defaults on your credit record?
Do you have any debts which don’t have defaults added?
Luke Stubbs says
Ok thanks for clearing that up. I realise my credit record is already very poor but I was just thinking long term and trying to repair some kind of damage and not leave any part settled markers on my file, so let’s say in 3-4 years time I have the best possible chance of being accepted for a mortgage.
There’s 5 defaults dated back to 2018 therefore I will part settle them as they will fall off in 2024 and 4 debts that haven’t defaulted therefore I will pay them in full.
Sara (Debt Camel) says
read https://debtcamel.co.uk/dmp-partial-settlement/. Unless you have the money to repay in full easily, it’s may be better to get partial settlements so (a) they are settled sooner and (b) you have more money for a deposit. There is no easy answer though, just be wary of assuming you will be in a better place if you repay in full.
Luke Stubbs says
Ok thankyou. When partial settlements are accepted, is the canceled debt/remainder of the debt classed as taxable income in the UK?
Sara (Debt Camel) says
no!
Jan says
I’d like some advice if possible…
I’ve been on a DMP for 8 years now and still have 4 years to go. A majority of the accounts defaulted so have dropped off my credit file. 3 accounts didn’t default and remain on my credit file showing DM.
Overall I’ve got £14k left to pay but only about £2k of this is from the 3 remaining on my credit file.
I’d really like to settle these 3 in full so that they will dropped off in 6 years as opposed to 10 (4 years left on DMP and 6 years to drop off credit file).
My question is: Am I allowed to settle in full with the 3 creditors remaining on my credit file? PayPlan have said this may be seen as unfair from the other creditors?
Or am I better off partially settling with all of them? How badly will a partial settlement effect my credit score?
A family member has said they will look at helping us out if we want to partially settle.
Sara (Debt Camel) says
If the money is coming from someone else, then if they say “you can have this money to repay these 3 debts” then there is nothing your creditors can do to object to this. You aren’t the one making a decision which treats your creditors differently.
BUT before you rush into this, there are a couple of other options which may be able to really help you.
First, the three debts still on your credit record. You can ask the original creditors (I am guessing that they have all been sold to debt collectors by now?) to go back and add a default date more than 6 years ago. See https://debtcamel.co.uk/debt-default-date/. If you can get the defaults added, the current creditor then has to use the same date and the debt will promptly drop off your credit record.
Second, you can look at any debts now owned by debt collectors where the original debt was a loan, credit card or a catalgue and ask the current creditors (NOT the original lender) to produce the CCA agreement for the debt. If they can’t, the debt isn’t legally enforceable in court and you can simply stop paying. See https://debtcamel.co.uk/settlements-old-debts-cca/ for more about why and how to do this.
Doing these two steps will help you clear up your credit record much sooner and will probably mean you have to have less help from your relative to settle the debts.
Brad says
I entered a DMP with 3 accounts in Nov 2016.
2 marked a note on my credit file mentioning the DMP and the last defaulted.
I notice on my credit file that these accounts only mention the default or DMP start dates as April 2017.
Anyway, I have paid off all debts now early and have been debt free for between 1-2 years.
My credit rating on Experian is 11 points below ‘Fair’.
How will this look if I went to get a high street mortgage in says 1 years time? That would leave the default at 4.5 years old and the settlement date of the DMP maybe 2-3.5 years old.
Is this possible without approaching bad credit mortgage lenders?
Sara (Debt Camel) says
This time last year that would probably have been fine to get a mortgage at an OK rate. But who knows what the mortgage market will be like in a years’s time? All you can do is save the largest deposit you can and not take out any more debt.
Liz says
Hi Sara
I entered into an IVA in Oct 2018 for 5 years @ £100pm. As I understand it all my payments are now on default each month so Oct 2024 my report should be clear and there will be no mention of my IVA, is this correct? I am scared to ever take on any kind of credit ever again so how would I go about making my report look good again?
Many thanks
Sara (Debt Camel) says
See https://debtcamel.co.uk/repair-credit-record-iva/
Andy says
My partner had a DMP for several accounts starting in July 2014. All of the accounts have now dropped off her credit file except one from Virgin Credit card which is now being collected by a debt Company after being transferred to them. The default date was 17/05/2015, which seems to be too late as I read that it should be within 3 to 6 months of arrears, so should have been around end of 2014 for default date. My wife needs to open a business account now but is worried about being rejected because of the default showing. I read your article about how to challenge default dates and I wrote to the Debt Company , who said they were investigating and would reply within 8 weeks, but have failed to do so. Do we have any hope of getting this default removed and how, or do you think her business account would be accepted now ? Everything else on credit files is good.
Sara (Debt Camel) says
The record will drop off her credit file after six years – so next month. I suggest waiting for that to happen.
I have no idea if she would be accepted for a business account at the moment.
Andy says
Thank you, but am I within my rights to request that the default be removed now as the interest on the card was stopped in July 2014, when Step Change took the plan on. The default was not put on until May 2015, when the account was transferred to the debt Company. It is really important that we have the default removed before The date in May as the business application has to go in at beginning of May, and if they reject it then I presume they will reject it even when the default goes. Is there anyone I can contact ? What do you think ?
Sara (Debt Camel) says
yes, you can ask.
However there is almost no chance of Virgin agreeing to this AND updating your wife’s credit records AND the debt purchaser then making the same update after Virgin in the next two or three weeks.
Sorry, but I am just being realistic here.
Andy says
Thank you. As a last question would a bank look more favourably to opening an account for someone who has a single default with less than a month to expire or is a default as bad after nearly 6 years as at the beginning ? The mortgage and other accounts are all up to date and only a small borrowing on credit card which is up to date
Sara (Debt Camel) says
I can’t say how any particular bank will view this, but most creditors care far more about recent defaults.
Christine Watson says
Hi Sara, we have been in a DMP with Payplan for approximately 13 years and have another four years before it finishes. We are aged 68 and 75 and now have considerable health problems. Five years ago a relative left us some money and we made 40% full and final payment offers to all our creditors. All but one creditor – PRA – accepted. PRA said they would not consider less than 80% so we were forced to keep up the DMP payments. We have three accounts that are with PRA. After suffering a recent heart attack, I’m now desperate to settle our debts but don’t currently have sufficient cash to do so. Around £15,000 in total is still outstanding to PRA. We have never asked for a CCA or challenged the debt in any way. Would it be wise to ask for a CCA now, with a view to making a further settlement offer or would it add considerably to my stress, which I’ve been advised to avoid where possible?
Sara (Debt Camel) says
These three debts – what sort of debts were they, cards, loans, overdrafts or what?
Are you buying or renting?
Are your DMP payments affordable?