Does Credit Counseling Affect Your Credit Score?

When consumers feel overwhelmed with mounting debt, high interest rates and stacks of unpaid bills, credit counseling can seem like an attractive option. But some actions to reduce debt can negatively affect your credit score. Find out whether credit counseling could potentially affect your credit score before meeting with financial advisors to avoid negative marks on your credit.

Credit Score

Lenders such as banks and credit card companies use credit scores to determine the potential risk involved with extending credit to a particular consumer. Landlords and potential employers may also access your credit history to better understand how you handle finances. Credit scores reflect the amount of debt you've accumulated and the types of credit accounts open (such as revolving credit, including credit cards and department store cards, or installment loans such as home mortgages and student loans). The formula also evaluates the length of your relationship with lenders, and how recently you've opened new accounts. Payment history is also a factor.

Credit Counseling

Credit counseling helps consumers organize financial information to get a clear picture of income, financial liabilities and debt, including balances owed, interest rates and repayment schedules. Counselors may help consumers formulate a plan to negotiate with lenders for benefits including reduced interest rates, lowered monthly payments or waived fees in the interest of paying down debt that may otherwise be left unpaid. Consumers may need to pay fees to participate in an agency's credit counseling program.

Advice vs. Action

Participating in credit counseling doesn't affect your credit score when you're seeking advice or assistance gathering together information about your various debts. However, credit counseling can negatively affect your credit score in that action steps recommended by credit counselors could hurt your credit, at least at first, if taken. For example, lenders may make a notation on your credit report that you're participating in a credit counseling program, signaling that you're having trouble paying bills. Debt may be partially settled, reducing the amount you'll need to repay but negatively impacting your credit. It may also be more difficult (or forbidden as part of credit counseling agreements) to seek new credit while in repayment programs. Over time, however, agreements resulting from credit counseling can lead to reduced debt loans and on-time payments, creating an overall positive effect on credit scores.

Risks

Seeking credit counseling signals to lenders that you're having trouble managing finances, particularly if some kind of specialized repayment plan, including lowered interest rates or reduced debts, is put in place. Missing payments on repayment plans can negatively impact credit, since it signals that consumers continue to remain a credit risk despite outside assistance. There's also the risk that consumers rely on credit counseling as a quick fix without addressing underlying issues related to spending habits, gambling or other factors contributing to large debt loads.