Does Credit Counseling Consolidation Hurt Your Credit Score?

Many credit counseling services offer debt consolidation options for overextended borrowers. It provides a means to get out of debt in a quicker and more efficient manner compared to managing separate accounts. However, it is best to do thorough research on debt consolidation before making this move to determine how it may affect your credit score.

Credit Counseling

A credit counseling service is a nonprofit organization that helps guide and advise consumers on various financial matters. Consumers can call these organizations to discuss their issues and seek help. The consumer must provide complete details about his financial situation (as well as counseling classes in some cases) in order to sign up for a consolidation program.

Consolidation

Debt consolidation is the process of combining debt balances into one loan, then paying off the new loan with one monthly payment. The consolidated loan sometimes comes with better terms, such as a lower interest rate or a more affordable payment amount. In some cases, a credit counseling agency can negotiate lower pay-off balances with lenders. Some financial experts, like Dave Ramsey, warn that consolidation options that offer lower monthly payments may also come with longer payoff lengths, which increases the total amount of interest cost you'll pay for the debt.

Effects on Credit

As long as the borrower continues to make on-time payments, agreeing to a consolidation with a credit counseling service isn't likely to have a direct, negative effect on his credit score. However, when a borrower closes a financial account, like a credit card, that can cause a drop in his credit score. The effect of closing accounts and consolidating to a more affordable option may be less damaging compared to missing payments or making late payments to those individual lenders over time. The credit counselor who offers the consolidation option can provide more advice on this matter.

Considerations

It is possible to try to consolidate debt into one loan with better rates on your own if your credit score and income meet lender requirements, but a credit counseling service is usually more familiar with the process. Another option is to try an aggressive debt payoff initiative, like snowballing the debt (paying off the smallest balances first then moving on). If you do decide to proceed with a consolidation, it is crucial that you choose a reputable agency. The U.S. Department of Justice publishes a listing of approved credit counselors.