What is ‘DMP’ in credit card terms?

Credit cards are a double-edged sword: while they offer convenience, they can also tempt us to spend more than we can afford. If balances are not repaid on time, credit card debt can quickly spiral out of control. Juggling multiple cards, each with different due dates and interest rates, can further complicate an already stressful situation.

One solution that may help if repayments become unaffordable is to take out a Debt Management Plan (DMP). In credit card terms, this means consolidating multiple card balances into one simple monthly payment, with the help of a debt management company. A DMP can make life easier in many ways, though it’s important to weigh your options before deciding if it’s right for you.

Why is credit card debt difficult to manage?

Credit cards can provide short-term flexibility but can easily lead to unmanageable debt. Here are some of the key reasons why credit card debt can be difficult to manage:

• High interest rates – If you don’t repay your credit card debt by the due date, even a small balance can rapidly grow, with interest compounding each month.
• Encourages overspending – When you make a repayment, your credit limit resets, making it easy to keep spending beyond your means.
• Minimum payments – Low minimum repayments may seem affordable, but they do little to reduce your principal debt, allowing interest to continue accumulating.
• Risk of defaulting – If you miss payments, your credit score may suffer, and creditors can pursue legal action to recover what you owe.
• Stress and anxiety – Being burdened with credit card debt often feels overwhelming and can take a significant emotional toll.

If you’re struggling with credit card debt, it’s important to seek help early before interest pushes your balances to unaffordable levels.

How can a DMP help with credit card debt?

A debt management plan (DMP) is an informal agreement between you, your creditors, and a debt management company that can help you repay your unsecured debts in a structured way.

While on a DMP, you make one affordable monthly payment to the debt management company, who distributes it between your creditors on your behalf. It’s suitable for most kinds of non-priority debts, including credit cards.

Because DMPs are not legally binding, they can provide a flexible debt solution that helps you repay what you owe without needing to go through formal insolvency processes. The key benefits of using a DMP to tackle credit card debt are:

01. One affordable payment

Rather than keeping track of several different credit cards and due dates, a DMP allows you to make one payment each month to your debt management provider. They’ll work with you to come up with a realistic repayment plan that works with your budget. This simplicity can help you stay on track and avoid missed or late payments.

02. Lower interest

As part of setting up your DMP, your provider will contact your credit card companies and aim to negotiate a more affordable monthly payment plan. Most creditors recognise that a DMP signifies an earnest attempt to repay your credit card debt, and will be willing to reduce or even freeze the interest on your account. This helps to prevent your debt from rapidly growing.

03. No dealing with multiple creditors

Provided your credit card companies agree to the repayment plan, your DMP provider will take over all communication and negotiation with your various creditors for you. This means no more receiving stressful letters or phone calls demanding payments.

With a single point of contact, you can focus on making your one monthly DMP payment, without the headache of juggling relationships with different credit card companies.

04. Focused route to repaying debts included in the plan

With a structured, manageable repayment plan in place, you can regain control of your finances and eliminate your credit card debt in a way that works for you.

The length of your debt management plan will vary depending on your financial situation. But as long as you keep up with your repayments (and don’t take on any additional debt), there will be a clear end date in sight. This can provide focus and relieve stress, as you’ll know exactly when you’ll have fully repaid the debts included in your plan.

Who could benefit from a DMP for credit card debt?

Debt management plans are designed to help those struggling with multiple non-priority debts, like credit cards. You may benefit from a DMP if:

• You have outstanding balances on several credit cards, and you’re finding it difficult to manage multiple repayments with different due dates.
• You have additional unsecured debts (e.g. personal loans) as well as credit card debt.
• You can only afford the minimum monthly payment on your credit cards and are not making progress on reducing your principal debt.
• You have missed some credit card payments recently and are at risk of needing to borrow more money to make ends meet.
• You’d prefer to deal with your credit card debt without resorting to a formal debt solution such as bankruptcy.

Because being on a DMP requires you to make at least a small monthly payment, you’ll need to have a stable income. If you can’t afford to pay anything towards your debt each month, a formal insolvency solution may be more appropriate.

Are there any downsides to DMPs?

While debt management plans can be very helpful for managing credit card debts, it’s important to consider their potential limitations before entering into one.

For example, reducing your monthly repayments through a DMP means extending the repayment term and possibly paying fees for the service, which may increase the total paid over the duration of the plan. It’s also worth noting that debt management plans are not legally binding, so there is no guarantee that your creditors will agree to reduced payments.

Additionally, if you miss a DMP payment, your credit card companies could reapply higher interest rates or pursue the debt through legal means. It’s important to carefully consider your financial situation before embarking on a DMP.

How do DMPs compare to other credit card debt solutions?

DMPs are just one route to tackling credit card debt. Here’s how they compare to some popular alternatives:

• 0% balance transfer cards: These allow you to shift your credit card debts to a new card with a 0% introductory period. This temporarily freezes interest, but a higher interest rate applies after the offer ends.
• Consolidation loans: These combine all your credit card debt into one new loan, usually with lower interest. However, they require credit approval and add to your overall borrowing.
• Individual Voluntary Arrangements (IVAs): This formal debt solution involves making reduced payments for typically 5-6 years, after which remaining unsecured debt is written off.
• Debt Relief Orders (DROs): Another formal solution, DROs can write off some or all of your credit card debt if you have very limited income and assets.

Each option for managing credit card debt has its own benefits and drawbacks. For example, formal insolvency solutions can impact your credit rating for up to 6 years. Seeking guidance from a professional debt adviser can help you decide on the right solution for you.

Take control of your credit card debt with support from DFH Financial Solutions

If your credit card debt is starting to feel overwhelming, a debt management plan might just provide the lifeline you need to achieve a better financial future. To find out if a DMP could help you, get in touch with DFH Financial Solutions.

Our experts will provide personalised advice and guide you through your options. Apply online today and begin your journey.