When managing your debt is more important than your credit rating

Chris Malloch, head of debt management specialist, Cleanslate, says that often clients will say that the chief factor that has prevented them from getting help earlier, was the fear that doing so would adversely impact their credit rating.

Cleanslate's Chris Malloch

“We have to be clear. Of course, a debt solution will adversely affect your credit score. But there are sometimes more important things in life than protecting your credit rating. Escaping a hugely stressful situation that may be impacting your physical and mental health can be so much more important. A credit rating can improve again over time, once a debt burden has been cleared through a debt solution,” he notes.

Moreover, it is often the case that when someone has become accustomed to working through a debt management arrangement, they find they can live without taking on debt.

The financial discipline and ability to budget that goes with working through a Debt Arrangement Scheme (DAS) or Protected Trust Deed (PTD) can make taking on additional debt both unnecessary and unattractive. Credit scores matter much less if you are not in the market for debt.

“It is great to see increased awareness of the information gathered and stored on credit files, and how that information is used by lenders when assessing applications for credit,” Malloch says.

However, an unfortunate, unintended consequence of the raised profile of credit reports and credit scores can be a misplaced sense that a credit score should be protected at all costs.

Cleanslate regularly sees people who are deeply in debt but delayed reaching out for help. Again and again, these people say that one of the main reasons why they delayed so long was because they did not want to damage their credit rating.

“As always, context is everything,” Malloch says.  “If you are seeking to borrow funds and want to do so at the best possible interest rate, then a high credit score is important.  However, if your credit score is being maintained because you are constantly having to “rob Peter to pay Paul” in order to keep on top of your debt repayments that is not good.

“If you find that you have little money for day-to-day essentials whilst your total level of debt keeps rising, you are most likely in an unsustainable position and should be looking for help and support from a debt expert like Cleanslate,” he comments.

One of the options available to people struggling with too much debt is to enter into a Debt Arrangement Scheme, or DAS. This requires an approved money adviser to work with the client to arrive at a single monthly payment that is affordable, over an appropriate time frame. The approved money adviser then negotiates an agreement with the creditors.

Put simply, under a DAS, the person is agreeing to repay all unsecured creditors by the end of whatever time frame has been agreed. These schemes have no legal upper limit in terms of how long the repayment period can run. They typically run for anything from one to ten years, but longer repayment periods are possible.

Importantly, under the DAS all interest due on the various debts is frozen and the amount that is being paid off over time is only the net total balance. Once that sum is paid, all the interest is written off. In itself, this can very significantly reduce the amount of debt a person is facing.

Equally important is that while keeping to the terms of their DAS the client is protected from the risk of having their creditors seize their assets. Whilst essential they continue to maintain their mortgage payments, this is particularly important, for example, for a homeowner who has some equity in their home.

Malloch points out that it takes a lot of skill and experience to work out what is actually affordable by way of a monthly repayment. Cleanslate experts work very closely with the client to understand their circumstances.

“We use approved guidelines which ensure that the client retains enough discretionary spend that an appropriate balance is struck between paying what you can to your debts whilst ensuring that all the day-to-day essentials are covered first. In many cases DAS will greatly reduce your total monthly debt repayments. It consolidates all your debt into a single affordable monthly payment,” Malloch says.

Most important of all, Malloch and his colleagues find that entering into a DAS gives clients a tremendous sense of relief. What looked like an impossible debt problem that has been hugely stressful for the client, is turned into something more manageable. 

“We constantly hear clients say things such as: ‘I have just enjoyed my first decent night’s sleep for months.’ The stress that unmanageable debt produces has incredibly bad effects that can create both mental and physical harm. Knowing that we are helping people to regain control of their finances and see improvements in the quality of their life is hugely satisfying for me and my colleagues,” he says.

Want to talk to the Cleanslate professionals about managing your debt? Then click www.cleanslate.co.uk