Debt relief and credit counseling are strategies you can use to lower your interest rates and make your debt payments affordable, which can help you get out of debt more quickly. These strategies can also end creditor calls and letters, reducing stress and interruptions throughout your day. In some cases, opting for debt relief or credit counseling can negatively affect your credit score.
Reporting by Debt Counselors
Most debt counselors do not report credit counseling to the credit bureaus. Even if your credit counseling company does report your counseling agreement to the credit bureaus, the current FICO scoring algorithm does not factor in information related to credit counseling. This means that signing up with a credit counseling service will not, in and of itself, lower your credit score.
Reports by Creditors
Although a credit report entry initiated by a debt relief or credit counseling agency will not affect your credit score, your lenders may opt to provide information related to your credit counseling agreement. Your agreement with a debt relief or credit counseling company may include a reduction of payment amounts or interest rates, which may prompt the creditors to report you as "not paying as agreed." Credit reporting and scoring agencies interpret these entries as derogatory items, which may reduce your credit score.
Impact of Creditor Reporting
The impact of reports initiated by creditors regarding participation in a credit counseling or debt relief plan depends on the information already contained in your credit file. Entering into a credit counseling agreement will likely have a more significant impact on your score if all of your debt payments are current than if you have recently missed payments. The exact credit score impact also depends on other factors that determine your score, such as the length of your credit history, the types of debt you carry and the amounts of your debt balances.
Considerations
If you are behind on your debt payments, and are using debt relief or credit counseling to help you eliminate your debt, the impact of entering into a credit counseling agreement will have a less significant long-term impact than continuing to miss debt payments. Likewise, if all of your payments are current, but you anticipate having problems meeting your debt obligations in the near future, entering into a credit counseling or debt relief agreement is a less damaging alternative than ignoring your impending financial problems.
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