How does credit counseling affect credit scores, and will credit counseling result in damage to one’s credit report or score?
Participating in credit counseling does not affect credit scores directly. A good credit counseling organization will provide budgeting and financial management education, which will help you gain control of your credit and keep it under control in the future. Participation in such classes will not appear on your credit report.
Only when a debt is repaid through a debt management plan will there be any indication of credit counseling on your credit report, and even then it might not impact your credit scores in any way.
A debt management plan involves the credit counseling agency negotiating lower interest rates or reduced repayment amounts with your lenders.
A comment may be added to the accounts in your credit report that are being repaid through a credit counseling program or debt management plan. So, lenders may see that fact. However, that comment won’t affect credit scores.
The payment status of the account will determine whether or not your credit scores are affected. A lender may report the account as being current and paid in full. If so, there will be no negative impact on your credit scores.
The lender also may report the account as settled, meaning paid for less than originally agreed. When you settle a debt for less than originally agreed, there will almost always be a negative impact on your credit scores, whether you negotiate directly with your lenders or a credit counseling agency does so on your behalf.
It is also very important to make sure the account payments are kept current during the transition to the debt management plan. Make sure that you understand when the credit counseling agency will begin to make payments on your behalf.
You need to be sure that no payments are missed between the time you enter the plan and the time the credit counseling agency starts making the payments. You may need to make a payment or two before payments begin to be made by the credit counseling agency.
Please avoid credit repair firms that claim they can fix your credit overnight, or that they can get accurate negative information removed from your credit report for a fee.
Also be cautious about organizations that only want to enroll you in a debt management plan. A good credit counseling agency will provide financial management education and will only suggest you enter a debt management plan if it is necessary.
Thanks for asking.
- The “Ask Experian” team