Every payment you make or miss affects your credit score. Every account you open or close affects your credit score. Judgments, liens and bankruptcies all negatively impact your credit score and rating, but what about consumer credit counseling?
Debt
Having debt affects your credit rating. As long as the debt is paid on time and you maintain balances below a certain percentage of your net income, the effect is positive. When payments are late, not made at all, or the debt begins to creep over that percentage, the effect changes into a negative one. Your payments, total amount of debt to income, and types of debt all play into a calculation that determines creditworthiness.
Debt Management Plan Reporting
Many consumers choose credit counseling over bankruptcy to resolve debt issues and protect their credit rating; however, credit counseling also has its impact on a credit rating. In a debt management plan, creditors often accept lower payments and a reduction in interest in exchange for regular payments. Because of this, consumers reported to be in a debt management plan will be viewed as less creditworthy to potential lenders in the future.
Creditor Responsibilities
Creditors do not have to update credit reports to reflect that an account is "current" if a consumer enters into a debt management plan, thus late payments or charge-offs may continue to be reported on credit reports, negatively impacting scores and ratings.
Prompt Payments
Credit counseling agencies may not make payments to creditors in a timely fashion either, resulting in more negative information being reported.
Bankruptcy
Bankruptcy, while a last resort, offers consumers an option to discharge or pay debt and have laws surrounding what can be reported and what cannot, allowing the consumer to address debt concerns and have a finite date for when the negative items will be removed.
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