There are a number of debt solutions that can help with unmanageable debts, but along with this can come downsides. Debt solutions that help to make unmanageable debts affordable again – including debt management plans – can affect your credit rating.
That’s not to say a debt management plan or any other debt solution should be avoided, because if you’re in trouble they could make a real difference. But you must be aware of these downsides before you start on any debt solution.
Quick guide to debt management
On a debt management plan, you’ll reduce the amount paid towards your unsecured debts each month to make them affordable again. For example:
– You have three unsecured debts, with payments coming to £600 a month
– Because of your other commitments, you only have £350 a month available
– On a debt management plan, your total unsecured debt repayments would be reduced to £350 a month (assuming your lenders agree to this).
A reduction in your debt repayments means your debts will probably take longer to repay, because you’ll still be expected to repay everything in full – but you’ll be repaying them more slowly. This could cost you more in interest in the long run, because you’ll be paying interest for longer.
However, lenders commonly freeze interest and charges on debts covered by a debt management plan. (Just remember that they are not obliged to agree to anything.) You’ll normally carry on with your debt management plan until your circumstances recover, or until your debts have been repaid.
Why will it damage my credit score?
Your credit rating will be affected because you’ll no longer be making the repayments you originally agreed when you took on the debt in the first place – you’ll be failing to stick to your repayment terms and this will appear on your credit report.
However, this needn’t be a huge problem in itself as long as your lenders are satisfied with the debt management plan. Lenders are legally obliged to accept any payment you make, but it’s obviously best to have their approval. Serious problems can occur if they don’t approve to reduced payments and decide to take action against you.
All records on your credit history remain for six years, and in this time, you may find it difficult to obtain new credit.