Will Negotiating a Lower Credit Card Balance Affect the FICO Score?

Credit counselors negotiate lower credit card balances for you through debt management plans (DMP). Although a DMP itself doesn't work against your FICO score, the way that you and your credit counselor pay back the creditors has a profound effect on the direction of your score. Also, having a DMP on your credit report may make it difficult to acquire new credit even after you've paid off your balances.

Credit Counseling

To negotiate a lower credit card balance payoff amount, your credit counselor must recommend a debt management plan. To find a reputable credit counseling agency, contact the Association of Independent Consumer Credit Counseling Agencies or the National Foundation of Credit Counseling. Credit counselors not only help you negotiate interest rates and balances, but they should also help you to create a budget to better manage your finances overall.

Debt Management Plan

After your credit counselor negotiates with your creditors, she will create a time line for payments. At the end of the time frame, if you've made all your payments, you will have paid off your debt. Instead of paying your creditors directly, you'll make one monthly payment to the credit counseling company, which will pay your creditors.

Credit Score

Your credit score is affected by negotiating a lower payoff amount in three ways: the inquiry by the credit counseling company, your payments to the counseling company and the counseling company's payments to the creditors. The initial inquiry is seen as a "hard inquiry," which creates a small negative impact on your credit score. If you make late payments to the counseling company, your credit score will fall further. If your counseling company makes late payments to your creditors, you will see your score plummet. The last reason is why it's vital to work with a reputable credit counseling company.

Considerations

Negotiating a lower balance through a DMP usually means that you will be prohibited from obtaining new credit throughout the life of the plan. Additionally, lenders may be hesitant to lend you money even after the plan is completed, as a DMP indicates that you have had financial difficulty making payments in the past and that you weren't able to pay off the full amount of your debt. A DMP may stay on your credit report for up to seven years.