Does Credit Counseling Hurt Your Credit?

Credit counselors are like fairy godmothers for managing your debt — when you feel in over your head, these pros can help you create a plan to get you back above water.

But does credit counseling hurt your credit? Not directly. While merely talking to a credit counselor won’t impact your credit score, taking action on any debt management plans they recommend could.

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How credit counseling can impact your credit

Credit counseling educates consumers and helps them create a plan to accomplish their financial goals, like paying down debt or creating a budget. Counselors often prescribe a debt management plan (DMP) to help you repay your debt, though they also provide a variety of other services.

Having a conversation about your debt won’t impact your credit — acting on the advice the counselor gives you could. To understand how financial counseling affects your credit score, we first need to get clear on the key factors that determine a credit score.

A FICO credit score is determined by five categories:

• Payment history: 35%
• Amounts owed: 30%
• Length of credit history: 15%
• New credit: 10%
• Credit mix: 10%

The most impactful factor in determining your credit score is your payment history — that is, how often you make on-time payments. In fact, a single missed payment can drop your score by more than 100 points and may stay on your credit report for up to seven years.

Within amounts owed is your credit utilization ratio, the percentage of your available credit that you’re currently using. A high credit utilization ratio — meaning you’re close to maxing out your credit accounts — can negatively impact your credit score.

One way to keep your credit utilization ratio low is to have unused open credit accounts, but your credit counselor may recommend that you close some accounts as part of your debt repayment plan. Closing these accounts could raise your overall credit utilization ratio. In addition, if you close an old credit line, it could also impact the average age of your credit history — still, this impact would be less than debt settlement or filing for bankruptcy.

What to expect when you visit a credit counselor

Credit counselors work with you to develop a personalized plan to address the financial challenges you’re facing. Often, the focus is on getting out of debt, which may involve budgeting and a DMP.

Through a DMP, your credit counselor will establish an agreement between you and your creditors that allows you to repay your debts with a single lump sum each month. You make your payment directly to the credit counseling agency, then the agency sends those funds to your creditors. Your counselor may be able to negotiate reduced rates or fees, or more favorable repayment terms, as part of your plan.

During your appointment, the credit counselor will review your finances and help you access your credit report. Don’t worry, though: This only requires a soft pull of your credit, and won’t affect your credit score.

It’s important to review your credit report with your counselor in case there’s inaccurate information, which could be negatively impacting your credit score. If you do find a mistake, your credit counselor can help you take steps to dispute the error.

How a debt management plan could affect your credit

A debt management plan is a common tool credit counselors use to help you get out of debt. Under the plan, you’ll make regular payments to the credit counseling agency, which will in turn pass that payment onto your creditors. In effect, this system acts like debt consolidation, by giving you only one monthly payment rather than managing independent payments to multiple creditors.

As you pay off your debts, you should see your credit score improve. However, part of your DMP may involve closing credit accounts once they’re paid off. While this could hurt your credit score in the short term by increasing your credit utilization ratio, building more responsible credit habits should raise your credit score over time.

Your credit counselor may also help you lower your debt payments. Note that the credit counselor usually can’t lower the total amount you owe. Instead, they negotiate lower payments by either requesting a longer repayment period or a lower interest rate.

If the counselor is able to reduce the amount of debt you owe, your creditors may report this as a debt settlement, which can negatively affect your credit. Accounts marked as “settled” will stay on your credit report for seven years, but your score should recover with time as you focus on responsible credit usage. And ultimately, the ding to your score from a settled account is smaller than if you were to default.

Where to find a credit counselor

Many credit counseling agencies are nonprofits, which provide services for little or no charge. It’s important to find a certified counselor who works with an accredited credit counseling agency with the proper licensing. At the same time, it’s best to avoid for-profit credit counselors as they may not have your best interests at heart.

To find a certified nonprofit credit counseling organization, check out those affiliated with these groups:

• The National Foundation for Credit Counseling (NFCC) is a great place to start. It’s the largest and longest-running nonprofit financial counseling organization in the country, and it can connect you with one of its many NFCC-certified credit counselors for free.
• The Financial Counseling Association of America (FCAA) members offer free financial education, and counseling and adhere to licensing requirements set by the states in which they offer credit counseling services to consumers.
• The United States Department of Justice maintains a searchable database of approved credit counseling agencies by state and judicial district.

Once you have a few potential credit counselors, verify their credentials through your state attorney general or consumer protection agency.

What to watch out for when seeking credit counseling

Now that you know where to find a credit counselor, let’s discuss what to watch out for to make sure you pick a good one. There are a few red flags to be aware of when seeking credit counseling:

• Scams: The Federal Trade Commission has flagged potential debt relief and credit repair scams, where counselors make lofty guarantees to eliminate debt or repair your credit.
• Asking for a large upfront fee: If a credit counseling agency asks for a large up-front fee, it’s likely a credit repair scam. Remember that many accredited credit counseling agencies are nonprofits that work for free.
• Charging for information: While you may need to pay a nominal fee for credit counseling, reputable organizations should be happy to send you free information about themselves and the services they offer, without needing any details about your situation first.
• Pushing a DMP too soon: While DMPs are commonly offered through credit counseling, be wary of any organization that pushes you into a DMP without first thoroughly reviewing your financial situation.
• Encouraging you to lie: No reputable credit counselor would ask you to lie or misrepresent information to reduce your debt. Not only is this strategy unlikely to work, but it can also land you in legal trouble.

Is credit counseling a good idea?

Credit counseling has many benefits, but it isn’t without its drawbacks. The only way to determine whether credit counseling is a good idea for you is to review your situation and examine how counseling can help you.

Credit counseling may make sense if:

  You have a lot of personal loan or credit card debt that can be addressed through a DMP.

  You want to consolidate your debts into one regular payment.

  You want help creating a budget or advice on money management.

  You want help disputing an error on your credit report or simply accessing or reviewing your credit report.

Credit counseling may not be a good idea if:

  Your debt is primarily in student loans or secured loans, like a mortgage or auto loan — these can’t be addressed through a DMP.

  Your debt is manageable and can be taken care of with debt consolidation or other debt relief options.

  You couldn’t even afford the payments under a DMP, in which case you may need to explore more serious options like filing for bankruptcy.

Whether you choose to work with a credit counselor or not, keep in mind that debt management is a long process. Your obligations won’t disappear after one credit counseling session, and neither will your credit score magically repair itself. Remember that credit counseling could hurt your credit initially as you follow the prescribed plan, but you may see your score start rising again after only one year.