Making your last debt management plan payment
At some point after beginning a debt management plan (DMP) you will be making your final payment. The period that this will take depends upon how much debt you started with and how much you have paid towards that debt each month via the DMP. This is a terrific achievement; during the term of a debt management plan careful financial budgeting and spending discipline are necessary. Most individuals will enjoy their success of having dealt with their debts and will also experience a strong sense of having been liberated from financial problems. Congratulations are well-deserved and a proper celebration should be enjoyed.
The debt management closure process
When you have repaid your debts in full there is little, if any, formal process to follow with your DMP company. You will want to advise them that your payments will now cease as this may be required by their terms and conditions. You will also wish to ensure that any standing order or direct debit arrangement that is set up to pay into the debt management plan is cancelled.
Building an emergency cash fund
When you make your last debt management plan payment you will quickly notice that your monthly surplus or disposable income has grown. You may have been paying hundreds of pounds into the DMP every month which is no longer necessary. Naturally you may wish to treat yourself a little more and enjoy some luxuries that you have denied yourself in recent times. However you are advised at this point to also make a commitment to some organised and regular cash saving.
Good financial advisers always suggest that everyone should create an emergency money reserve that is easily accessible in a bank account. This fund should contain at least a sum equivalent to three month’s income. This fund will protect you if a major event such as being made redundant, becoming unwell, substantial car repairs or important remedial works to your home. It’s precisely these sorts of unexpected expenditure that force many people into developing debts and needing a DMP in the first place; your emergency cash savings will go a long way to insulate you from any such expenditure or risks.
Looking after your future finances
Once emergency cash savings are in place, we advise that you arrange a meeting with an IFA (Independent Financial Adviser) to investigate options that will create financial security for you in the future. If you are paying an interest-only mortgage on your home it might be sensible to change your mortgage arrangements to a repayment loan. If you do not you risk having to fund a mortgage in retirement when most people find that they have a reduced income.
You might not currently have a pension in place. An Independent Financial Adviser can look into your retirement income options to help you to secure a decent quality of life as a pensioner. As a further security, you might consider other ways to build a financial safety net including tax-efficient savings vehicles, such as an ISA. Protection insurance against risks such as redundancy or ill-health may also be a good investment for some of your newly increased disposable income.
Accessing credit again
Credit is a mostly considered to be a good thing. Naturally some individuals that have worked through long debt management plans choose to never access credit again. Others prefer to enjoy the positives associated with credit, but go about it in a very prudent manner.
There are several positives associated with the responsible and careful use of credit. Credit cards remain a handy and relatively safe means of payment when travelling, typically offering additional security when purchasing via the internet, and could be a necessity for certain specific activities like renting a vehicle. You may need to personally pay for work expenses that will be later reimbursed by your employer; credit cards can help to bridge the gap.
Credit also facilitates the “smoothing” of high and low cost periods. Christmas is the classic example of this; using credit to help manage the extra costs of buying presents and entertaining may be sensible so long as the full balances can be repaid when the bills arrive. Larger purchases including houses and vehicles might not be viable without credit being available and used.
Your credit score, and thus your ability to obtain credit, will be negatively affected by the repayment issues that resulted in the need for a DMP. The debt management plan itself will not show on your credit record, but missed payments, late payments and any default notices issued by your creditors will remain on your credit file for six years from the point that they were added. These previous black marks on your credit record will restrict lending availability and also potentially the terms upon which this lending could be offered. Taking a few straightforward steps after a debt management plan will help you to move towards once again accessing to mainstream lending in the future.
Some practical steps to improve your credit score
There are many steps you can take which will help to repair your credit file. An important first move is to get hold of a copy of your credit file. Following the full repayment of all of your debts you should see that any “default notices” previously issued have been marked as being “satisfied”. Some lenders might have failed to make this update and you will need to get in touch with them and ask that they quickly update the credit reference agencies that hold your information. If you see anything else on your file that is not correct you should speak with the lender concerned and request that errors are corrected.
Please remember that your credit score isn’t just a function of negative credit events. It also reflects on the positives. To maximise your credit score you will have to be clearly managing some current credit lines excellently. If you do not have any existing lines of credit, no positive information will be being added to your credit record. This will restrict the recovery of your credit status.
Mortgages are one type of credit that are always reported on credit records. If you currently pay a mortgage it is vital that you ensure full payments are made on time each month. A mobile telephone credit contract can be useful for building up some credit positives. You may find it helpful to set up the mobile phone payments on a direct debit to avoid any risk of late or non- payment should the bill slip your mind.
A high-interest credit card (available often to people with less than perfect credit scores) might be another useful tool. As long as you use the card only for a limited number of smaller transactions (that can easily be repaid in full when the bill arrives) the excessive interest rates some charge need not be a factor. Such actions will help you to create some positive credit history over and above the debt problems that you have put into the past. Lenders are often more interested in recent credit behaviour than older problems that have been resolved.
Finding a mortgage after a DMP
Mortgage lending terms are now restrictive compared to the deals that were on offer only a few years ago. This applies to all of us, whether or not we have had problems with credit or have been in a DMP. However, there are once again practical steps that you can take which could assist you to find a new mortgage.
You must ensure that your credit record has been cleared-up (as previously described) in the period after you completed your debt repayments via the debt management plan. Just as importantly, you’ll need to re-establish a good credit payment record once again.
You’ll also need to save up the largest house deposit that you possibly can. After you have put together your emergency cash fund you should find that it is possible to put money aside for a future mortgage deposit. You may well not be able to purchase a home with the type of limited deposit (such as the five per cent or ten per cent) that could have been viable in recent years. This is a factor that affects everyone, but is especially relevant if you have an imperfect credit record.
The passage of time during the period in which you are saving up a house deposit will also work to your advantage. Your debt difficulties will be further behind you which will further improve the chances of securing a good value mortgage. Six years after old credit issues such as a default notice occurred, they will no longer be apparent on your credit file.
Work hard not to build up further unsecured debt balances. Any total of unsecured debt will reduce the amount which a mortgage provider will be happy to lend to you as their “affordability” assessment will tell them that your capacity to repay a mortgage is reduced.
Seeing a specialist mortgage adviser is an important move. They know about mortgages from mortgage lenders you’re unlikely to have heard of. They also understand which providers are more tolerant of certain kinds of credit problems. A mortgage broker will know how much certain mortgage lenders will lend to you in line with your earnings and capacity to pay. Working to find a mortgage for yourself in the aftermath of a debt management plan is “hit and miss” and risks multiple credit searches being run which is often counter-productive to your goal of obtaining a mortgage loan.
We trust that the suggestions and information provided in this article has been useful for you. We also hope that as well as enjoying your success in having finished your debt management plan, that you will prioritise the creation of an emergency fund, protect yourself against risks and work to create a strong financial future for yourself.
If you would like any extra information please visit our debt management plan forum where a panel of debt management experts (and fellow site members) will be able to answer your questions and share their knowledge.