Can Credit Counseling Hurt Your Credit?

A woman sitting at a table with papers, using her laptop t o work on finances at home.

Credit counseling is the process of working with a credit counselor to pay off your unsecured debts, often through a debt management plan.

While a debt management plan won't affect your credit score directly, there are some aspects of the process that could impact your credit history. Here's what you need to know if you're considering credit counseling.

Does Credit Counseling Appear on Your Credit Report?

Credit counselors offer a variety of services, including everything from providing basic money management advice to setting up a plan to help you pay off debt. If you have a lot of unsecured debt that you're struggling to repay—especially on credit cards—but you aren't ready for more drastic measures like bankruptcy, your credit counselor may recommend setting up a debt management plan.

With a debt management plan, you make one monthly payment to the agency for all of your eligible debts, and then it divides up that amount and pays your creditors directly. You'll typically pay a small fee upfront and as well as a monthly fee for the service, and you'll likely have to close the credit cards included in the plan.

Credit counseling simplifies your repayment process, ideally making it easier to pay off your debt. In some cases, credit counselors can negotiate lowered interest rates, reduced monthly payments and more with your creditors, which could save you money.

How will all this play out on your credit report? When you repay a debt through a debt management plan, a creditor may add a comment to the account on your report saying so. Future lenders will be able to see the notation when they run a credit check during the application process, but it won't directly impact your credit score.

That said, there are some aspects of the credit counseling process that can influence your credit score for better or for worse.

How Credit Counseling Can Affect Your Credit

Paying off debt often includes various moving parts, and some parts of the process can influence your credit score.

Closing Accounts

The credit counselor may require you to close your credit cards at the beginning of the debt management plan to ensure you don't rack up more debt. When this happens, it reduces your available credit, affecting your credit utilization ratio.

This ratio, which represents how much of your available credit you're using, makes up 30% of your credit score. It's calculated for each individual card, as well as across all of your cards. So if you have credit cards that aren't included in your debt management plan, your utilization rate will go up when you close the ones that are.

Depending on your situation, a higher utilization rate could cause your credit score to drop significantly.

Closing credit accounts can also affect your length of credit history going forward because they'll stop aging. This won't affect your credit score immediately, because the positive account information will remain on your credit report for up to 10 years, but it could hamper future credit score growth.


The payment status of your accounts included in a debt management plan will determine whether your credit score is affected. A lender may report an account as current or paid in full, which can have a positive impact on your credit score.

But if the credit counselor negotiates for you to pay less than what you owe, the account could be reported as settled, which means you didn't pay what was originally agreed. In this case, there will likely be a negative impact on your credit score.

Also, it's essential to make sure you make your monthly payments while you transition your accounts to a debt management plan. If you miss a payment and it goes unpaid for 30 days or more, your credit score will suffer.

As you work with the credit counselor to set up the plan, make sure you understand when the credit counseling agency will begin to make payments on your behalf and plan to stay on top of your payments until that time.

Is Credit Counseling a Good Idea?

Credit counseling has benefits and drawbacks, and it's important to understand your situation to determine whether you need a credit counselor. Here are a few things to consider:

  • It only works for certain debts. If you're struggling to make payments on a mortgage, auto loan or another type of secured loan, you won't be able to include it in a debt management plan. The same goes for student loans. However, if you have credit card or personal loan debt, you can include that.
  • Other options may make more sense for you. If your credit is in great shape and your debt is manageable, it may be better to apply for a balance transfer credit card or consolidation loan with a low interest rate to pay off your other debts. Just know that if you do this and then continue to charge on your credit cards, you'll likely end up in worse shape. A debt management plan is best if you can afford to make a monthly payment and don't want the temptation of open credit accounts. In contrast, if you wouldn't even be able to afford monthly payments under a debt management plan, you may need to consider more serious measures, such as bankruptcy.
  • It's not free. Debt management plans typically have a setup fee of $50 and monthly fees of about $25, and plans typically last three to five years. If you can find a cheaper alternative, it may be worth it. Note, however, that credit counseling agencies may waive their fees if you're experiencing serious financial hardship.

If you're still not sure whether a credit counselor is right for you, set up a consultation with one to get their perspective. While debt management plans cost money, the advice counselors give is free.

How to Find a Good Credit Counselor

If you've decided that credit counseling is right for you or you want to consult with a counselor about your situation, it's important to find a good credit one who has your best interests at heart. In general, steer clear of for-profit credit counseling agencies. Nonprofit agencies are more likely to charge lower fees and provide unbiased advice.

The first step is to make sure the credit counseling agency is certified. You can find these agencies through any of the following:

Once you find a credit counselor, set up a meeting to talk about your situation and ask for advice. A good credit counselor will analyze your full financial picture before making any recommendations. If they recommend a debt management plan without this step, it may be a red flag.

Because debt management plans can last as long as five years, it's important to take your time with this part of the process to make sure you find the right fit. Once you find a counselor you feel comfortable with, you can proceed with the next steps.

Check Your Credit Score During the Credit Counseling Process

Because credit counseling can have an impact on your credit, it's important to check your score regularly to understand how certain actions impact it and determine what you can do to improve it.

Also, consider checking your credit report before and during the credit counseling process. This can help you pinpoint areas you need to address, and can also help you identify potentially incorrect or fraudulent information on your reports. If you find something, you can dispute it with the credit reporting agencies to have it corrected or removed. Depending on the situation, this could help your credit score.

How Good Is Your Credit Score?

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