How Does Third Party Intervention Impact Your Credit Score?

3.2 million people called the National Foundation for Credit Counseling for debt management help in 2010. Third-party intervention for debtors usually results in the customer improving his credit score, but some people can see a drop in their scores just by using such services. Ultimately, third-party intervention can do little to help a credit score or a debt situation if the debtor does not make enough money or has an unsustainable budget.

Identification

Third-party intervention for debt management often means a credit counseling service. This type of organization charges a monthly fee, sometimes up to $140, to negotiate lower interest rates and monthly payments on behalf of the debtor. This will not affect your credit score, according to the BCS Alliance.

History

In 1989, when credit scoring become commonplace in the lending industry, having credit counseling service on your report would lower your score. By 1998, the FICO formula dropped the negative impact of credit counseling on scores because more people in counseling entered before debt spiraled out of control.

Potential for Damage

Instead of the debt management company, it is the creditors who could damage your score while in counseling, according to Kiplinger. A lender may report an account as not "paid as agreed" if your management plan constitutes of reduced payments or interest that brings the monthly installments lower than those called for in the original schedule. The severity of the damage depends on how good your score was before counseling

Debt Settlement

An alternative to credit counseling is a professional debt negotiator, called a debt settlement company. A debt settlement company works with a debtor and could settle an account for as little as 20 cents on the dollar. This almost always results in a negative item on your credit report that notes the account was settled for less than the original balance.

Warning

The Better Business Bureau highly recommends consumers avoid credit repair services that guarantee to repair credit or want an advance fee. No company can raise a score with 100 percent certainty, and any knowledge they have is widely available for free.

Tip

You can probably draft your own debt management plan without the help of a counseling agency. Start by eliminating frivolous spending and focus on the debt with the highest interest and work your way down. You can refinance your own debt, shifting a balance with a high interest rate to an account with a smaller one. You can call your lender's customer service line yourself and ask for a interest rate reduction or a restructured payment plan.