Does Credit Counseling Lower Your Credit Score?

Credit is a huge part of the American economy, with most people in the United States having some form of debt. Not surprisingly, credit counseling companies and nonprofit agencies track how much debt Americans acquire and eliminate. Before getting credit counseling, it's reasonable to wonder whether it will impact your credit score, because the entire purpose of credit counseling is to improve your financial situation.

General Rule

Typically, credit counseling does not impact your credit score. The reason is because credit counseling, at its core, is really only advice. You can get much of the same information a credit counselor gives from other financial professionals such as bankers, brokers and tax agents.

Provider and Charges

Where you get your credit counseling may impact whether the counseling impacts your credit score. If you get counseling through a nonprofit agency, your score likely won't move, because the company doesn't ask you for a fee and therefore doesn't ever put you at greater financial risk. If you are paying for the counseling, however, and if you don't pay your fees, the counseling company can report non-payment the same as any other lender or vendor. Some debt management companies require credit counseling as a service condition, and counseling also is a condition for filing bankruptcy. Enrollment in a debt management company or the bankruptcy filing, not the counseling itself, is what often puts a ding in your credit score.

The Purpose of Counseling

The purpose of credit counseling is to rectify bad financial habits and get you back on solid monetary ground. You are supposed to take the good advice the counselor gives you and make changes to your payments and budget. This means that credit counseling is supposed to have a positive impact on your credit score. There is no guarantee, however, that credit counseling will raise your credit score by a specific amount, so stay away from counseling companies that make these kinds of promises. There also is no guarantee that the financial advice the counselor gives will prove to be the best option, although most credit counselors give solid advice. For this reason, don't jump into any changes too hastily, even if they come from your counselor---always try to do your own research and verify what the counselor tells you.

Additional Debts

Credit counseling often is a requirement for debt relief like debt management or bankruptcy, which is why it has negative connotations for credit. However, it also can be a requirement for getting additional debt, such as if you want to apply for a home mortgage---the Department of Housing and Urban Development, for instance, requires counseling for their loans. In some cases, taking on these debts may establish a good credit history with lenders, which can give your credit score new life.

The Bottom Line

Regardless of why you need credit counseling, credit counseling ideally is a one-time deal. The impact of the credit counseling on your credit score, even if negative, will not last forever.

Regardless of your credit score, some lenders see credit counseling positively, because they assume you'll learn the skills necessary to be a good borrower. Others see the fact you have credit counseling negatively, because they know it is hard to change the habits that got you into money trouble in the first place.

If you feel that counseling will help you in the long-term, or if it is mandated given your financial choices, seek a reputable counseling company.