I’ve been giving debt advice for seven years and in that time I’ve talked with people from just about every walk of life who have fallen into difficulty with their finances.
Over the years I’ve spoken to many people who have felt like having a good credit rating is a sign that they’re a good person.
They therefore think that by damaging their credit rating this will somehow make them a bad person.
I’ve never subscribed to this viewpoint and I don’t think you should either.
Does a DMP affect my credit history?
First things first: a debt management plan (DMP) can be a great way to get back in control of your finances and reduce the payments on your debts to a manageable level (although this does mean that you’ll be repaying your debts for a longer period). Although they’re not obliged to, if your creditors are willing to co-operate then in most cases they’ll freeze their interest and charges too.
The DMP itself isn’t registered on your credit file but the record for debts included in it will have a flag added to them. This will indicate that the debt is being repaid through a DMP, so anyone checking your credit file can see you’re making reduced payments.
The bigger impact from being on a DMP is that you’ll be making reduced payments to each of your creditors. This could potentially lead to:
- Missed payments being registered against your credit file – these stay there for at least 24 months and up to six years
- Defaults being added to your account – these remain on your credit file for six years
- County court judgments (CCJs) being registered on your account, also for six years
It’s almost certain that missed payments will be registered against you on a DMP. Defaults are very likely but that depends on your creditors and CCJs are less likely but can happen in situations where the creditor is unhappy with the payments they’re receiving.
We firmly believe that it’s most important to deal with your debts rather than having a good credit rating. It’s also worth mentioning that for most people their credit rating will already be on the slide before they start a DMP.
Can I improve my credit rating while I’m on a DMP?
I’ve been asked in the past whether it’s a good idea to try and improve your credit rating while on a DMP, to be more creditworthy once the DMP is complete. My honest opinion is that it’s not worth the bother. Once you’ve finished your DMP there are some steps you can take to improve your credit rating but if you’re still on a DMP then it won’t make a huge difference.
The best thing you can do to improve your credit rating while on a DMP is to try your best to get your debts paid off. The sooner you can do that then the sooner you’ll start to look like a more attractive prospect to future lenders. And a major benefit of being debt free is that you’ll feel better in yourself as well.
What is a credit rating anyway?
This article has talked about credit ratings quite a lot but we’ve not spent any time considering what a credit rating is. The truth is that there isn’t a universally accepted system to attribute whether companies can lend to you, just like there isn’t a blacklist of people who can’t borrow.
Lenders all make their own decisions based on the information they think is important. Credit reference agencies hold details about your financial accounts but it’s the lenders that crunch the numbers and decide if they want to lend to you or not.
My wife found herself in a situation which illustrates this point. A couple of years ago she applied for a mobile phone contract and was rejected but a couple of weeks later we were approved for a mortgage application.
So the information on your file can be interpreted differently from one company to the next; one company thought she couldn’t be trusted to repay a phone contract but the other was willing to offer her a mortgage!
Don’t sweat the small stuff
Having a debt problem is much more likely to be a symptom of bad luck rather than being a bad person. In our 2013 Personal Debt Statistics Yearbook we revealed the most common cause of a debt problem was redundancy or unemployment which could happen to anyone.
Your credit history only contains facts and figures about your financial accounts, and it would be a pretty terrible tool to find out whether someone is a decent person or not.
So instead of focusing your attention on a credit rating that doesn’t define who you are as a person, it’s better to concentrate on your most important concern: paying off your debts.
What do you think?
- Do you think that having a good credit rating makes you a good person? Or vice versa?
- Have you had any experiences of your credit rating stopping you from doing something?
- Do you know have any good strategies to cope with a damaged credit file?
Share your thoughts below!