Enrolling in a credit counseling plan by itself generally has no negative impact on your credit score or creditworthiness and should not directly affect your ability to borrow money. However, sometimes the subsequent activity that comes with enrolling in a credit counseling program may damage your credit report and restrict your overall ability to borrow money.
High Balances/Bad History
Credit counseling enrollees may already be experiencing problems on their credit reports due to late payments, high debt utilization ratios and over-the-limit fees. Those who are effectively managing credit usually do not benefit from credit counseling. If you are finding your debt load unmanageable and have to turn to credit counseling, your creditworthiness may already be suffering to a point that would make it difficult, if not impossible, to obtain credit.
Closure of Accounts
When a creditor accepts your account into a credit counseling program, they will often close the account. Per their agreements with the credit counseling agencies, the creditors usually lower your interest rates and waive any fees. The card issuer is sacrificing some or all of its profit and therefore decides you are not a valued customer. Closed accounts can mean lower total available credit and higher debt utilization ratios. Both of these things can reduce your credit score and negatively impact your ability to borrow money.
Agreement to Not Establish New Credit
Creditors require consumers to not establish new credit as a condition of accepting an account into the credit counseling program. If you agree to these terms, you will not be able to obtain new credit while part of the credit counseling program. Obtaining new credit may prompt your creditor to remove your account from the counseling program and revert back to the old interest rates.
Credit Reporting of Counseling
Some creditors will make a note on your credit report that you are participating in a credit counseling program or mark your account as paid, but not as agreed. These remarks generally do not hurt your credit score, but other creditors may see these comments and decide that you may be struggling with debt and are not a good borrower. Also, as previously noted, a new lender may realize that you are disallowed from opening new credit while participating in credit counseling. A creditor may see this and automatically reject any new credit applications based on this logic.
Debt Settlement
Sometimes, credit counseling involves aggressive negotiation to reduce your total outstanding balances. When an account is settled for less than it is owed, the remainder of the amount is charged off and this is a serious delinquency on your credit report and score. A charge off indicates to prospective lenders that you were unable to pay your previous commitments in full and will hinder your ability to obtain financing on favorable terms, if at all.
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