Do Credit Counseling Services Damage Your Credit?

A job loss, a sudden unexpected expense or poor planning can cause you to fall into debt. You may find yourself unable to manage your debts, and you may miss payments on your credit card and loan accounts. Having large debts or missing payments on your credit and loan accounts will hurt your credit score. Credit counseling services offer ways to help you overcome your debt problems without taking a toll on your credit score. There are, however, a number of factors to consider.

Function

A credit counseling service works with you and your creditors to help you repay your debts and start rebuilding your credit rating. Credit counseling services review your current debts and financial situation and create a repayment plan to pay off your debts. They can also negotiate a settlement amount with your creditors. You pay the credit counseling service a monthly amount, and the service pays your creditors directly. A debt management plan typically lasts three to four years.

Credit Counseling Service and Credit Reports

Using a credit counseling service will not have an effect on your FICO credit score, the three digit number that represents your credit report. Bankrate reports that the Fair Isaac Corporation stopped factoring a credit counseling service in your credit score as of 1999. However, your credit report will show that you are working with a credit counseling service as long as you are working with a debt management plan.

Positive Credit Effects

Using a credit counseling service will not have a negative effect on your credit score as long as you keep making monthly payments on a debt management plan. Working with a payment plan created by a credit counseling service will also help you pay off your debts and bring your past due account currents. Paying down debt and resolving outstanding balances will improve your credit score.

Considerations

While a credit counseling service will not lower your credit score, you may have trouble opening new accounts, especially with smaller lenders. As your debt management plan appears on your credit report, some lenders may consider you high risk if they review your credit report manually. However, not all lenders review credit reports. Many lenders use your credit score when deciding on your application.