One of the top questions that consumer credit counselors receive from prospective clients is how will my credit be affected. Don't be surprised if you get an answer that still leaves you feeling uneasy. There is no absolute answer to this question---the procedures followed by each creditor and each credit counselor will vary.
Identification
Credit counseling agencies, also referred to as debt management agencies, are organizations that help consumers who are in over their heads with debt. Consumers can pay down their bills, stop bill collector calls and start on the road to a debt-free lifestyle. Debt counselors work with creditors to reduce debt balances and interest rates to affordable levels.
Initiation
When you start up with a credit counselor, the agency will call and work with all of your creditors directly. The goal is to get all of the creditors on the same page about when they will be repaid, which, in some cases, could take months or years, and at what rate. The counselor will ask your debtors to stop reporting late payments on your credit report, and in some cases, the creditor will simply report you as being on a credit counseling plan.
How Does It Affect Credit?
Credit counselors are usually very vague about what will happen to your credit report when you work with them, because they are not 100 percent sure. The responses from creditors will vary. Some will back off, report your account as on a debt management plan and leave you alone. Others will try to take collection actions against you. According to Fair Isaac, your FICO score does not include information about your participation in a credit counseling plan (see Resources).
Considerations
Though creditors are supposed to stop calling and attempting to collect the debt after they are contacted by the credit counselor, some don't get the message. Also, some creditors pass the debt off to a debt collection agency that has not yet gotten the message (or that simply does not care). In this case, you may still have items placed on your credit report or receive calls. You have to take additional steps on your end to stop collection activities.
How to Stop Persistent Creditors
To stop persistent creditors, you must write a cease-and-desist letter to the creditor or collections agency to tell the company to stop calling and contacting you about the debt. Give the company full information about the credit counseling agency you are working with. Get the letter notarized and send it via registered or certified mail, so you will have proof that the collections unit received the information.
A creditor cannot continue to contact you (with a few exceptions, such as an intent to sue) after the company receives this letter. A creditor also cannot report false information on your credit report. If the creditor continues to harass you or is not reporting correct information on your credit history, you may be able to sue the company under the Fair Debt Collection Practices Act (FDCPA; see Resources). You can win up to $1,000 in damages if the creditor is in violation.
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