
If you have cut everything you can but your debts still don’t seem to be falling, you should probably look at a DMP
This dilemma happens when on a very minimal budget you can just about afford the minimum monthly payments on your debts but your snowball – the amount extra you can overpay each month – is very small or non-existent so it is going to take ages to get debt free.
How long would it take without a DMP?
You can use the Snowball calculator to find out how many years it would take to pay off all your debts.
In practice it would probably get quicker, because as your debts get less, you have more chance of getting cheap credit offers, such as a 0% balance transfer card. But the time from the calculator is a good rough guide.
Could you live on that restricted budget for that long? Read How far to cut back? for thoughts on this topic.
How long will a DMP take?
You can estimate the length of the plan by dividing your total debt by the amount you are paying each month. There are two assumptions here – first that all your creditors freeze interest and second that you are either running the DMP yourself or using a DMP company that doesn’t charge you any fees. So if you owe £10,000 and you can pay £200 a month to the DMP it will take 10000/200 = 50 months, a bit over 4 years.
This may be shorter or longer than the snowball, depending on how much you have “relaxed” your budget. But it will be more workable as the planned expenses are more realistic. You can’t live without new clothes for 5 years and if you have children, then as they get into their teens they do cost much more.
(Of course if a DMP is still going to be 8 – 10 – 12 or more years, then you need to be exploring other options, such as Selling the House or Insolvency.)
Won’t my creditors refuse this DMP?
You may be wondering if your creditors will accept your DMP if you could actually manage without one by cutting back further. That depends on the figures in your income and expenditure. StepChange have a budget calculator called Debt Remedy that provides ranges for things like groceries, medical costs etc – you could look at those and see how your actual amounts compare.
Sometimes if you are paying a fair amount to a DMP a few creditors won’t freeze interest – but if most of them do then you will still be making much faster inroads into your debt.
Setting all your budget lines to the maximum you think you can “get away with” if you would actually be comfortable to live on a bit less is not generally a good idea – it will mean that it could take a very long while to become debt-free. This is especially important if you have a house with equity in it because some creditors will be happy to freeze interest for 6 months or a year but not afterwards.
Your credit rating
If your credit record at the moment is good, you should also think hard before opting for a DMP. With a good credit record, you may well be able to reduce the interest you pay on your debts. If you can get a 0% balance transfer you are effectively getting much of the benefit of a DMP without the black marks on your credit record and with no hassle from creditors or worries about getting taken to court.
If you have a mortgage (or hope to get one once your unsecured debts are gone) then a good credit record is very important as it will affect your chance of getting mortgage or a remortgage at a good interest rate. But if you are currently renting and don’t expect this to change, it is reasonable to shrug and say you don’t care about that.
One person’s story
A reader sent me this:
“My debt was mainly through credit cards which I began to use during my uni years and shortly after graduating. Their shiny marketing appeal and 0% balance transfers were all to attractive to a fun loving girl in her twenties who dreamed big and thought that my career in teaching would payback this lifestyle. How wrong I was!
By the time, I reached my late twenties, reality hit home that I had got myself in a right mess which didn’t seem redeemable at the time. Although I was making regular payments and was managing my debt, I wasn’t getting ANYWHERE in actually paying it off due to the interest rates charged.
Before I began my DMP, I literally felt at breaking point. I was also desperate to start a family but felt that I wasn’t in any position to be bringing a little person into the world when my financial situation seemed so dire.
I was diagnosed with depression and was taking anti depressants for 2 years to help me cope with the guilt and shame I felt with debt. I was able to come off these as soon as I began my DMP. It was like a weight off my shoulders having the support of my DMP firm.”
Give it a try but be prepared to change
Apart from the credit record issue, this choice isn’t irreversible:
- you can start by trying to snowball and then change to a DMP if you realise your budget is unrealistic;
- you can increase or decrease your payments in a DMP as your situation changes;
- you can opt for a DMP and then switch to making full repayments if things improve quickly. If this is after more than a few months though, the damage to your credit record has already been done and it’s better to stay on the DMP with frozen interest and clear your debt faster.
Bala says
Thanks for the great article.
Regarding the second point in the end “you can opt for a DMP and then switch to making full repayments if things improve, “.. What effect it will have on the credit rating? same old six years on the file or will it drop any quicker. Once we start makaing full repayments will it improve the credit rating?
Any thoughts, please
Sara (Debt Camel) says
yes the article wasn’t very clear – I have updated it to say ending the DMP and going back to full payments is only usually worth it in the first few months. After your debts have been defaulted, it simpler and quicker to stay in the DMp and just clear them fasted without any interest added.
Rhian says
I am due a refund from a payday loan company. It’s a significant chunk and could reduce my debt by almost half but I’m unsure which debt to direct it at to make the biggest impact on my day to day finances and my credit score. They’re all non priority debts. Where could I get advice like this?
Sara (Debt Camel) says
Do you have debts that are charge ing you interest?
Do you have debts that are defaulted and not having interest added?
Could you make affordability complaints about any of the other debts? Was there a credit card or an overdraft where the credit limit was increased to a daftly high level? A very high interest loan or car finance?
Rhian says
I have one defaulted loan that’s not adding interest that I pay £200 a month for. The pay out would clear it. I did have a credit card that increases to £8000 without any real reason for it and probably affordability wise shouldn’t have been, could that be a complaint? I have been reading the articles about complaints to the likes of 118 money and likely loans who I have had loans from in the past but over 6 years ago is that a problem?
Sara (Debt Camel) says
if you only have one loan and it has defaulted so no interest is being added, you could pay the money off that. Or just keep it as an emergency fund – with bills and prices going up, everyone needs a bit of savings!
For credit card affordability complaints read https://debtcamel.co.uk/refunds-catalogue-credit-card/
For refunds from loans such as 118 money and Likely loans, read https://debtcamel.co.uk/refunds-large-high-cost-loans/.
Complains about something over 6 years ago are likely to be rejected by the lender, but just send your complaint to the Ombudsman and explain you have only recently found out that the lender should have checked the credit was affordable for you so until now you did not know you had a reason to complain. The Ombudsman can look at these older cases.