A reader asked in a comment on my article on How does a DMP affect your credit rating? :
“I have 6 months left on my DMP and I know my credit rating is rubbish. Will my rating improve once this is paid off?”
That’s a simple question, but it needed rather a long answer. This article is for people who are near the end or who have already completed their Debt Management Plan (DMP) by repaying their debts. If you are thinking of starting a DMP, or are in the early stages, the link above is more relevant, as it looks at what your different options are.
First, well done on being so close to the end of your DMP! Although your credit rating may be bad now, it will improve and this has sorted your debt problem without the more permanent harm insolvency does to your chance of a future mortgage. You also have the satisfaction of knowing that you have paid back every penny you borrowed.
But it’s understandable now that your thoughts are now focusing on your credit rating. Even if you don’t want to rack up the credit card balances again, a good credit rating is useful if you want to rent a new place or buy a car on HP. And it’s essential if you want to get a good mortgage offer.
How are your DMP debts showing?
There are two ways a creditor can report a debt in a DMP:
- the debt may be marked as “AP”, this stands for “arrangement to pay”.
- the debt may be marked as “defaulted”. (You may see a string of defaults, one a month, but you can ignore these. The only one that matters is the first default.)
Some creditors may have gone the AP route and some may have defaulted the debt. And some may have originally used an AP marker than later added a default. It can be confusing, so it’s important to know exactly what your credit records say.
You can check your credit record for free using Credit Karma, but I recommend checking all three credit reference agencies if you are serious about finding out what is happening.
What happens at the end of a DMP?
When your DMP is completed, all the debts should have a zero balance because you don’t owe anything. They should also be marked as settled (if they haven’t been defaulted) or satisfied (if they have been defaulted).
Creditors update credit records once a month, so allow five or six weeks from the last payment before seeing if all your debts to have been updated. There normally isn’t a problem here, but if one isn’t updated to zero, check first with your DMP firm when the final payment was made. Then contact the creditor and ask why a balance is showing.
Problems such as defaults and payments in arrears matter less as they get older, see How much will my credit score change if… ? for some examples of how this works. There isn’t a huge jump the month after your DMP finishes because the debts in your DMP are still showing. But as the DMP becomes further in the past and as you start to get new “positive” marks, your credit score will improve more.
How long before the DMP debts disappear?
This depends on how the debts were marked:
- a debt with an AP marker and no default will remain on your credit file for six years from the point at which it is settled.
- a defaulted debt will remain on your credit file for six years from the default date. If your DMP has lasted more than six years, you may find that some debts have already gone!
Up until now you may have been pleased that a debt wasn’t marked as defaulted, because an arrangement to pay doesn’t sound as bad. But defaulted debts are going to disappear before AP debts, so you may be wishing they had all been marked as defaulted…
Sometimes you can get this changed as the creditor has not put the correct default date on. Read What should the default date for a debt be? – that explains what the “rules” are and how to ask for a default date to be added, or changed to an earlier one.
If this works, it can make a big difference to the time it takes for your credit score to improve.
Three ways to speed up credit file improvement
These will help your credit score to increase faster:
- “Good housekeeping” Make sure all the personal details on your credit records with each of the Credit Reference Agencies is correct: your address and previous address; no financial links with an ex; keep things generally stable, not chopping and changing accounts more than necessary; and be registered to vote (surprisingly important for your credit score!)
- Make every payment on time Be fanatical this is for the next few years – you are going to kick yourself if after 18 months hard work getting your score up you pay one bill late over Xmas. Set up as many payments as possible to be by direct debit so you can’t miss one – this includes gas, electricity, water and phones, not just “debt”. Be especially careful when you are ending a mobile contract as this is an easy one to miss – double-check with the mobile firm that you don’t owe any more and keep/print out your last bill showing a zero balance.
- Start getting “positive marks” Get a “bad credit card” and use it every month for some small routine spending and pay it off in full every month. Use this soft search tool to see whether you will be accepted for a card – you want to avoid rejected applications as they leave a bad mark on your file. These cards have horrible interest rates, but they are a great tool if you stay in control, see How to avoid the bad credit card traps for details. Getting a mobile contract is also a good idea – it’s another regular monthly “tick” being added to your credit files.
What are your priorities?
At the end of a DMP, you must have a long list of things to spend money on: treats for the kids, a holiday, new carpet etc. Take a few months off and celebrate… but then think about your long-term priorities:
- a good emergency fund will safeguard your future – every month save part of the money you were paying into your DMP in a place you can’t dip into easily. A Credit Union account could also help with affordable borrowing if you ever need it;
- mortgage – start to overpay it if it is a repayment mortgage or get a repayment plan if it is interest-only;
- put more into a pension – if you aren’t contributing to a pension fund, find out if your employer will add extra contributions.