Prevailing Wisdom is Not Always Correct
Before I wrote this article, I did a quick google search for Does Credit Counseling Hurt Your Credit and I learned 2 things.
1. That the prevailing wisdom (if that is what we are calling the first page of Google these days) seems to indicate that no, Credit Counseling also known as a Debt Management Program (DMP) does not Hurt your Credit Score.
2. Prevailing wisdom is not always an accurate source for information.
Many people think that a DMP will not have a Negative affect on ones Credit
It appears that when FICO first introduced their scoring model in 1989 it would include the fact that a consumer had enrolled into a Credit Counseling Program (DMP) as a negative event in its scoring algorithm. In 1998 FICO made a change to ignore this event from the scoring model. Thus the myth that Debt Management programs will no longer have a negative affect on ones credit score prevailed.
How Does Credit Counseling Hurt Your Credit?
While the fact that a consumer is enrolled into a DMP program is not specifically factored into the credit scoring model, the effects of the program will be. For instance, when you enroll into a Consumer Credit Counseling program, your credit cards will be closed and all available credit on the enrolled cards will be zero. It has been well established that the amount of credit available is a major component to the scoring model.
When your cards are closed you will still show all of the outstanding debts with no further credit available. This will certainly have an affect on your credit score. Also some creditors will indicate on your credit report that you are enrolled into a program to help pay off the debt at a reduced rate. While this indication will not affect your credit directly, it will certainly affect your ability to borrow money.
Should I Avoid Credit Counseling because my Credit Will be Affected?
No. If you are currently paying high interest rates, and looking for Debt Solutions Speaking with a licensed Credit Counselor about your situation is an advisable thing to do. Even though a Credit Counseling program will have an affect on your credit score, the effects of falling behind on your payments to your creditors would likely be much worse.
As you make your payments in the Credit Counseling program you should likely see an improvement in your overall credit score as the debt gets closer to being paid off. Also remember that speaking with a qualified Credit Counselor about your situation will not have any negative affect at all on your credit. To speak with a Credit Counselor about whether or not a CCCS program would be appropriate for you, contact Consolidated Credit at Best Credit Counseling Programs.
Like with anything else, it is best to learn all the pros and cons of a Credit Counseling program to determine if it is the right solution for your debt situation. In most cases, if you are feeling pinched by your debt repayments, you should be more concerned with getting the debts paid off, than on how a strategy may or may not affect your credit score.
Credit Counseling Does Affect Your Credit, but not as Badly as Debt Settlement or Bankruptcy
When compared to a Credit Card Debt Settlement or a Bankruptcy approach, a Credit Counseling program will typically be the least damaging to your credit score because with a Credit Counseling program you will stay current on your debts and pay off the debt in full when the program is completed.
So although not as damaging as the alternatives, a Credit Counseling program will temporarily hurt your credit score and I don’t feel that the articles on the first page of Google do an adequate job of explaining this fact. However by clicking 1 or 2 of the social media share buttons below, you can help me get this information on the first page of google rather quickly, and help to correct a flaw in the prevailing thought that Credit Counseling will not hurt your credit.
Magellan had to circumnavigate the Globe to help change the prevailing wisdom of the day and all I have to do is ask you to click a button. Anyone else think Google has made us soft?
Thanks for clearing up that myth for us. I think it goes without saying that the best option is not to put yourself into debt in the first place. However, we all know there are many circumstances that require the use of credit as a last resort. I would suggest taking the time to carefully dissect each credit option before making a final choice.
Hey Vin,
Good advice. The problem many consumers have is that everywhere they turn for help, they end up speaking with a sales person and they are not likely going to get objective advice. So even when they try and research the various options, the information they receive is often slanted and misleading.
In my experience – I worked for a Credit Counseling agency for 3 years – working with us would help credit scores for about 2/3s of our clients and hurt another third. It depended a lot on how far behind they were on paying their debts, and how far over their credit limit they were.
Most of our clients were so far over limit and behind on payments that they would have had to have come up with thousands of dollars to bring the accounts current – at that point, paying the minimums would have been doable. But since until they brought the accounts current overdraft and over limit fees would keep accumulating, and if they had the thousands in available cash they not be in the situation to begin with, so that was a non-starter.
Yes, signing with us would look worse than being 3 – 4 months behind in payments … but without a debt repayment plan they would eternally be 3 – 4 months behind.
Hello Fern,
Excellent point. Every situation is different and every consumer should speak with a knowledgeable professional about their own unique situation before making a final decision.
You are right though, if a consumer is already a few months behind, likely has their credit limit dropped to their balances and has their credit in a nose dive anyway, then of course the issue of whether or not a credit counseling program will hurt their credit would be a moot point.
So the best way to answer Does Credit Counseling Hurt Your Credit would be to say that it depends. If your credit is already shot, then it likely isn’t going to hurt it much. If your credit is still good then you are likely to see a drop in score.
Just remember, often times, you need to make the best financial decision to get out of debt, regardless of what will happen to your credit score in the short term.
Thanks for stopping by to share your thoughts from inside the Credit Counseling World.
I wonder how those other webmasters got their posts on this issue to the top of the search results pages; another case of erroneous information spreading on the ‘net (via links to it) like a wildfire?
Hey Sonny,
That is one thing about the Internet. Anyone can say anything and put it out their for the world to read. The web is a great place to get information. The problem is, you can never tell if it is actually right.
Hi Damon,
I was wondering why my debt is totally hard to pay this time. I actually needs someone to ask information regarding my problem minimizing my debts. I hope I can rely on you on this matter. Thanks.
Hello Sophia,
Sure I would be happy to help. Please schedule a consultation with me via the link at the top of the page and I can review your financial situation and let you know what the best strategy to move forward with will be.
Most of our clients were so far over limit and behind on payments that they would have had to have come up with thousands of dollars to bring the accounts current at that point, paying the minimums would have been doable. But since until they brought the accounts current overdraft and over limit fees would keep accumulating, and if they had the thousands in available cash they not be in the situation to begin with, so that was a non-starter.
Hello Gessille,
These days most banks are willing to waive the amount of money required to bring the account current and will shift it to the back in an effort to get the consumer back in good standing on a hardship program.
If a consumer can afford the new monthly payment at a reduced rate, the fact that they are a few months behind does usually not pose an issue.
We cannot avoid financial problems but i think that there are a lot of ways in which we can prevent ourselves from getting drowned with tons of debts.. i guess it would be a matter of discipline and right knowledge regarding saving money.
well for me it’s better no credit less stress and no worries how to pay it This will certainly have an affect on your credit score. Also some creditors will indicate on your credit report that you are enrolled into a program to help pay off the debt at a reduced rate. While this indication will not affect your credit directly, it will certainly affect your ability to borrow money.
Hey Alve, yes you are correct and that is the key. It will affect your ability to borrow money and that is the main purpose of having a good credit score in the first place.
In most cases, if you are feeling pinched by your debt repayments, you should be more concerned with getting the debts paid off, than on how a strategy may or may not affect your credit score.
Hey Rudelyn,
I absolutely agree with you.
Thanks for stopping by.
If anything I would suggest that it would slightly improve it given that credit ratings often rely on evidence of regular payments to address debt. If you can demonstrate an ability to pay small but regular amounts then this has to help
Credit counselling is a great method for dealing with debt, but I don’t see how it could damage your credit score? Intresting discussion topic though as I’ve never actually given it any thought before now.
Yes, I agree that when it comes to taking charge of your debt, doing something is better than doing nothing. Being part of a credit counseling program is much better than the alternative of taking no action.
Credit counseling agencies can be a major benefit for helping consolidate your credit card debt.
Hi Damon, I think that when you enroll in a debt management program it can also effect the length of time a bad mark (such as a charge off) stays on your credit. If you begin paying on a debt that you previously stop paying, the clock for the time that bad mark rolls off your credit, begins again. I could be mistaken, but that is what a debt collector once told me.
According to the FICO company, credit counseling is the only program that does not harm your credit score. Stay away from programs like settlement, elimination, etc though.
Credit counseling definitely has the ability to ruin one’s credit score, especially if the agency is advising you to not make payments on a bill. Regardless of whether a bill is fraudulent, I would recommend making payments anyway while at the same time disputing it. I would not ruin my FICO score over something stupid.
If it’s already too late and you have only option is to get debt counseling, it will definitely hurt your credit score. However, based on my experience, most people who are looking for debt help have probably gone down the road far enough that any more negative blemishes on a credit report won’t hurt as much. Where debt counseling comes in handy is helping you to admit that you have a debt problem and helping you to work on getting back on your feet without having to go through bankruptcy.