Can Credit Counseling Hurt My Credit Rating?

Your credit rating is influenced by nearly every financial action you take, from opening, paying and closing accounts to letting a car or home get repossessed or declaring bankruptcy. Reputable credit counseling may help you avoid drastic measures, especially if you seek assistance as soon as you start having trouble paying your bills, and it may also enable you to preserve your credit rating.

Definition

Credit counseling means various things, depending on the type of debt management assistance you need. The Federal Trade Commission (FTC) website explains that it might be as simple as reading materials on a credit counseling firm's website or attending money management classes. You may need to speak directly with a counselor in an office, online or in a phone conference to create a personalized plan. Counselors help with budgeting and discuss options, such as creditor negotiation, formal repayment plans or bankruptcy.

Direct Effects

Your credit rating is based on the information in your reports complied by each of the three major credit reporting bureaus -- TransUnion, Experian and Equifax -- and your credit score is calculated from the credit bureau information. The MyFICO website notes that payment history, debt load, account types and length of time you have used credit are among the factors used in calculating a credit score. Credit counseling is not part of the credit score formula, so it does not directly affect your rating.

Indirect Effects

Credit counseling is most commonly sought by people having trouble paying their bills. While the counseling itself is not harmful to your credit rating, the circumstances that made it necessary hurt you, according to the Privacy Rights Clearinghouse. This includes being delinquent on your payments, having accounts charged off by the original creditors and placed with collection agencies and having things such as auto repossessions and court judgments in your credit bureau records.

Warning

Successful credit counseling helps you raise your credit rating over time as you get your finances back under control. Reputable credit counselors do this by helping you develop your own budget and hone your money management skills or enrolling you in a debt management plan administered by the credit counseling companies. Such plans are usually structured to eliminate your debt within five years if you pay as agreed. MSN Money writer Liz Pulliam Weston warns that many people who seek counseling do not have the means to participate in a debt management plan, and there is a high drop-out rate for those who do enroll. You may need to file bankruptcy, even though it deals a severe blow to your credit, if you are having severe financial problems, because a failed debt management program will damage your credit rating anyway.