When deciding how to deal with debt, one important factor to consider is the ability to access credit and how this might be affected in the future. Below we outline what DMPs could mean for credit scores.
Debt Management Plans are an Informal Solution
Debt Management Plans (DMPs) are an informal solution to problem debt, which means there is nothing legally preventing you from applying for further credit. However, it is a good idea to speak to your DMP advisor before doing so, since your creditors might be reluctant to continue with the plan if you are taking on more credit whilst paying them back at a lower rate.
Charity DMP providers will usually require that you do not take on any further credit during the course of the DMP, but some private providers might have a different policy.
If you were to apply for credit, during or just after a DMP, you should bear in mind you’re your credit score will be lowered. When you apply for credit, potential lenders will be able to see that you have been making payments towards your debts which are lower than you had originally agreed to. This will affect whether or not they decide to lend to you.
Types of Credit
Having a low credit score can have a number of effects on what you are able to do – some of them surprising. Here are a few key types of credit, and how your access to them would be affected by a DMP:
- Mobile Phone Contracts
Taking on a SIM and handset phone contract requires a credit check, since this is essentially a rent-to-own service. If your phone contract comes to an end during the course of your DMP, you will likely have to keep your old handset and take out a SIM only service, or buy a new handset outright.
Some landlords will carry out a credit check on prospective tenants, so whilst having a DMP is unlikely to affect your current tenancy, as long as you keep up with your rent payments, it could prevent you from taking out a new lease.
- Personal Bank Loans
Most high-street banks will be unwilling to lend to someone whilst they are in the middle of a DMP. This is because being in a DMP lets lenders know that you have had trouble with debt in the past, and can currently only afford reduced payments. This suggests that you would not be able to manage further monthly repayments.
- Short-term Loans
Short-term lenders, such as payday loan companies, tend to target people with low credit scores, who cannot access credit elsewhere. Using their services, during a DMP or otherwise, is not recommended, since they tend to have exorbitantly high interest rates.
- Credit Unions
One alternative source of credit for someone with a DMP could be a credit union. These lenders offer affordable loans to their members, and are much more willing than high street banks to lend to people with poor credit history.
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It is best to avoid taking on further credit during a DMP if you can possibly avoid it. You could run the risk of the DMP being withdrawn, or falling into further unmanageable debt. If you are met with an unexpected cost during the course of a DMP, there are other options for dealing with it, however.
The first thing to do when an emergency expense emerges is to contact your DMP provider. Your creditors may allow you to temporarily reduce your payments, or take a break from them, whilst you deal with the expense. If possible, it is a good idea to put any money you have left over at the end of the month into an emergency savings account. This can provide a financial cushion.
Where can I get more advice on Loans for People on a Debt Management Plan and other debt solutions?