Does Debt Counseling Hurt Your Credit?

Credit counseling has been stigmatized, with many people falsely believing that simply using a credit counseling service negatively affects their credit. Before deciding whether to participate in credit counseling, understand how it actually works and how to control the way your credit score is impacted.

Credit Counseling

Going to see a credit counselor does not hurt your credit score. Previously, the score could be slightly lowered if your credit report mentioned credit counseling; however, in 1998 the Fair Isaac Corporation decided not to allow credit counseling to affect the score after realizing that doing so was preventing people from talking to a credit counselor until the problem took hold. Now, the FICO scoring formula ignores any references to credit counseling.

Debt Management Plan

A debt management plan (DMP) doesn't directly impact your credit score, either. However, a creditor may report that your debt is being paid through a reduced-interest or reduced-payment program, which may lower your score. Also, any credit lines closed because of a DMP can lower your debt utilization ratio, which is a key factor in calculating your credit score.

Credit Score Calculation

To keep your credit score as high as possible while undergoing debt counseling, pay attention to the other factors that are included in the calculation of your score. Timeliness of payments accounts for 35 percent of your score, while debt utilization makes up 30 percent. The length of your credit history is 15 percent, new credit is 10 percent and credit diversity is 10 percent. A reputable credit counselor can help you figure out how to best work with your finances to keep your credit score afloat.

Considerations

Although a DMP may negatively affect your credit score, weigh the negatives against the positives. Most people who qualify for DMPs are already late on payments, and according to Bankrate, one payment that is 30 days late already drops your score by 90 to 110 points. The impact of a DMP may initially lower your score even more; however, credit counseling should assist with budget creation and help you get out of debt more quickly. Decide if the long-term benefits are worthwhile.