Will debt management affect my credit rating?

We are going to look at two questions in this article: firstly, what is debt management, and secondly, will entering debt management affect your credit rating?

If you’re already familiar with debt management and how it works, you can skip straight to the second section of this article, which looks at how entering a debt management plan can affect your credit rating.

What is debt management?

If you’re having difficulty repaying your unsecured debts – such as credit cards, personal loans, overdrafts, etc. – every month, it’s important to find a way of repaying your debts at a rate you can afford as soon as possible.

A debt management plan could be one suitable option. If you can’t make your repayments to your unsecured lenders as originally agreed, a debt management plan could allow you to make one payment per month, following a repayment plan that’s tailored to what you can actually afford.

You could choose to draw up and follow your own debt management plan, but if you agree one with the help of a professional debt management company, they could also deal directly with your lenders on your behalf, which can take away much of the pressure of phone calls and paperwork.

So how exactly does a debt management plan work? It’s an informal (non-legally binding) agreement between you and your unsecured lenders, in which you – or your debt management company – will ask them to accept reduced monthly payments you can afford every month.

If your repayment plan is accepted, your unsecured lenders may also agree to reduce or freeze interest and other charges on your debts, so they won’t increase as you’re repaying them.

However, it’s important to remember that making lower repayments every month means you’ll also be paying off your debts for a longer period. And if your lenders don’t agree to freeze or reduce interest on your debts, it could end up costing you more in interest overall, since your debt will have longer to accrue interest.

Will debt management damage my credit rating?

As debt management is only an appropriate option if you actually can’t afford your original repayments, chances are you’ll already be in financial difficulty before your agreement is accepted.

So your credit rating may have already been damaged. Whether or not you actually enter a debt management plan, failing to make the payments you agreed to when you first took on a debt can affect your credit rating for five years, potentially making it harder and/or more expensive to obtain further credit in that time.