Question from a viewer: If you go to a credit counselor for help, how it will affect your credit history and credit score?
If you’ve been following us for very long, you’ve heard a lot about ways of dealing with debt, from bankruptcy to debt settlement to credit counseling. Of the techniques centered around professional help, credit counseling is generally my favorite. But if you go to a credit counselor, how will it affect your credit history and credit score?
Wayne wrote in with this question today:
If a person uses a credit counseling agency to help get one’s credit card balances under control and pay them off, does this action hurt your credit score in any way, or should I say, does it make you look bad on your credit report.
That’s a great question, Wayne, and one I’ve been asked many times. Here’s the answer: Talking to and/or getting advice from a credit counseling agency is normally free and has no effect on your credit history whatsoever. However, if your credit card debt is out of control, it’s likely that you’ll end up on what’s called a Debt Management Program, or DMP. These programs are at the heart of the credit counseling industry. What they essentially involve is having the agency get between you and your creditors to help facilitate a payback plan: one that often includes reduced interest rates, waived penalties and fees, and monthly payments you can afford. Once this deal has been worked out, you agree to close any open credit accounts and thereafter send one monthly payment to the counseling agency, which they divide between your creditors. These plans typically last 4-5 years.
Now, let’s get back to Wayne’s question: As I said above, talking to a credit counseling agency doesn’t ever show up anywhere. A DMP, however, does show up in your credit history. But it should have no impact on your credit score.
Here’s a cut-and-paste from the website of the company that’s responsible for most credit scores, Fair Isaac:
Using a credit counseling service and having this situation reported in your credit report should not have any negative impact to your FICO® score. However, the actions you take based on the recommendations of a credit counselor may sometimes affect your score. For example, choosing to make partial payments or agreeing to settle for less than the full amount on accounts may be regarded negatively by the FICO® scoring model. Additionally, any late payments occurring either before or after you began the plan may also be regarded negatively.
Bottom line? Enrolling in a Debt Management Plan (DMP) through a credit counseling agency will show up in your credit history, which may have negative implications to some creditors. But it won’t, in and of itself, cause a decrease in your credit score.
Two other heavily advertised methods of dealing with debt, however, will have a much greater negative impact on your credit history and score. Bankruptcy and debt settlement often involve not repaying the entire debt. And that’s something that will always negatively impact on your credit score.
We recently did a story about how various actions affect your credit score: check it out!