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Does getting credit counseling affect your credit score?

By Laura Gutmann on September 3, 2010

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Getting professional help to get out of debt is an important step for many people who find themselves too deeply in trouble to handle repayment of loans and bills on their own. You should always consider going to a reputable credit counselor who can help you make a budget, gain control of your finances, and get back on your feet. Simply meeting with someone to go over your personal financial history and get advice will not affect your score in any way.

However, it is important to note that many credit counseling agencies arrange for their clients to enter special debt repayment or settlement programs. In that case, your creditors will be informed, and while some may be pleased that you are facing your problems, they may still, “put a note in your credit report saying you're participating in a debt repayment plan” , making it difficult for you to get additional loans until the repayment is over. Keep in mind that it is necessary for the credit counselors to contact your creditors, so they can negotiate for lower interest rates and new terms that will help you pay off what you owe. Besides, if you are in deep debt, you shouldn’t be taking out new loans anyway, until the old ones are cleared away. Once you’re done with your repayment, you can follow up to make sure the designation is removed from your current financial history and move forward without that black mark on your report.

In addition, it’s important to know that there is a difference between debt repayment and settlement. Settlement is a more serious step, where your agency, “asks your lenders to accept less money than they are owed”¹. Sometimes it is necessary to go to those lengths to be able to get your debt under control, but you should first understand that your credit score would be affected negatively for the next seven years that your settlement status is on record.

To ensure that your credit counselors are giving you good advice, it is always best to work through a nonprofit or low-cost agency.

Source:

¹ http://hffo.cuna.org/12433/article/350/html