Credit Counseling & How it Affects Your Credit

Credit counseling agencies can advise people on how to manage their debts, or they can go a step further and help them create debt management plans. Simply getting advice from one of these agencies will not hurt your credit and may help you pay down debt. Entering a debt management plan can damage your credit because the agencies negotiate for lower fees and interest rates.

Credit Counseling

Reputable credit counselors begin by offering a free consultation about your finances. Credit counseling agencies report that about a third of clients can handle their finances on their own after such a session, according to MSN Money. Sessions can be done in person, over the phone or via email, depending on the preference of the client and the setup of the agency.

Choosing a Counselor

The Federal Trade Commission cites many sources for credit counseling, including universities, credit unions and branches of the U.S. Cooperative Extension Service. MSN Money recommends finding a counselor from the Association of Independent Consumer Credit Counseling Agencies or the National Federation for Credit Counselors to ensure fair dealing and low fees. Both FTC and MSN recommend you check any counseling agency with the Better Business Bureau and don't use any agencies that charge high upfront fees.

Debt Management Plan

If you and your credit counselor agree, you will create and follow a debt management plan. You will agree on an amount to send the counseling agency every month. From that, they will pay your unsecured debts. Depending on how much you owe, the amount the agency will expect you to set aside for this monthly payment plan is considerable and requires strict budgeting efforts. The counseling agency usually requires you cut up your credit cards, too. The agency charges a fee, often around $40. The AICCA and NFCC both have fee limits on their member agencies.

Counseling and Credit Ratings

Having visited a credit counselor will not negatively affect your credit. However, entering a debt management plan can hurt it since counselors generally negotiate down fees and interest rates with creditors. If creditors choose to note this on your credit report, it shows that you did not pay the debt as originally agreed, and that can look bad to other creditors. How individual creditors respond to this information varies, according to MSN Money. Some may count it against you and refuse credit or charge higher rates. Others may not see it as a negative.