How Credit Counseling Affects Your Credit Score

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Credit counseling involves working with a certified counselor to come up with a plan to pay off your existing debts. While this service can be helpful and doesn’t directly affect your credit score, some actions you take while working with a credit counselor can impact your score.

Key takeaways

Enrolling in credit counseling doesn’t directly impact your credit score, but the actions you take while in the program can affect your score.
Closed accounts and timing of payments are two of the factors that have the greatest impact on your score.
If you’re considering enrolling in a credit counseling program, make sure to choose a reputable nonprofit agency with certified counselors.

How credit counseling can impact your credit

Enrolling in credit counseling won’t directly impact your credit score, nor will it show up on your credit report. However, since the goal of credit counseling is to help you pay off your debts, some actions that you take during your participation in the program can impact your score.

Let’s take a look at the elements of credit counseling and how each could affect your credit score.

Debt management plan

One of the tools that many credit counseling agencies use to help you get out of debt is known as a debt management plan (DMP). A debt management plan allows your credit counselor to negotiate with your creditors on your behalf. They’ll often ask them to waive fees or reduce your interest rates, which can make it easier to pay down your debts.

During the course of the debt management plan, you’ll make regular payments to your credit counselor, who will pay your creditors for you.

Sometimes, creditors may also add comments to your credit accounts, indicating that you’re on a debt management plan. While this won’t directly affect your credit score, future lenders will be able to see this information when they pull your credit, which may make it harder for you to be approved for new accounts in the future.

Debt settlement

If you truly can’t afford to pay back what you owe, your credit counselor may recommend debt settlement. As the name suggests, debt settlement allows you to “settle” your debts with your creditors for less than your total balance.

While this method may sound ideal, unfortunately, it will negatively impact your credit score. Debt settlements stay on your credit report for up to seven years. Plus, any payments that you miss while working out your debt settlement agreement will ding your score as well.

On-time payments

No matter which route you take, how reliably you pay your bills will also affect your credit score. Payment history accounts for 35% of your FICO score, making it the biggest factor.

If your payments are on time, it can have a positive impact on your score. On the other hand, if you miss a payment or a payment is more than 30 days late, it can negatively impact your score.

Credit utilization ratio

Your credit utilization ratio measures how much credit you’re currently using versus how much you have available to you. The lower the ratio, the better. If you are successful at chipping away at your debts over time, your ratio should continue to improve, which will have a positive impact on your overall credit score.

However, if you continue to take on new debts, the opposite is also true. As this ratio rises, your score could take a hit, especially if it soars over 30%.

Closed accounts

Your credit counselor may recommend that you close your credit accounts in order to help you avoid the temptation to run up new balances. That said, closing accounts can negatively impact your credit score, especially if the closed accounts were some of the oldest in your name.

Length of account history makes up 15% of your FICO score, where the age of your oldest credit account and newest credit account are both considered, along with the average age of all of your accounts. By closing an old account, you effectively shorten your credit history.

Closing accounts can also harm your credit utilization ratio because you’ll have less credit available to you overall.

How to find a credit counselor

Many credit counseling agencies are nonprofits that provide services for little or no charge. It’s important to find a certified counselor who works with an accredited credit counseling agency with proper licensing.

To find a certified nonprofit credit counseling organization, check out those affiliated with these groups:

The National Foundation for Credit Counseling (NFCC) is a great place to start. It’s one of the largest and longest-running nonprofit financial counseling organizations in the country, and it can connect you with one of its many NFCC-certified credit counselors for free.
Financial Counseling Association of America (FCAA) members offer free financial education and counseling.
The United States Department of Justice maintains a searchable database of approved credit counseling agencies by state and judicial district.

Once you have a few potential credit counselors, verify their credentials through your state attorney general or consumer protection agency.

What to watch out for when seeking credit counseling

There are a few red flags to be aware of when seeking credit counseling:

Scams: The Federal Trade Commission has flagged potential debt relief and credit repair scams, where counselors make lofty guarantees to eliminate debt or repair your credit.
Asking for a large up-front fee: If a credit counseling agency asks for a large up-front fee, it’s likely a credit repair scam. Remember that many accredited credit counseling agencies are nonprofits that work for free or for a nominal fee.
Charging for information: While you may need to pay a nominal fee for credit counseling, reputable organizations should be happy to send you free information about themselves and the services they offer, without needing any details about your situation first.
Pushing a DMP too soon: While DMPs are commonly offered through credit counseling, be wary of any organization that pushes you into a DMP without first thoroughly reviewing your financial situation.
Encouraging you to lie: No reputable credit counselor would ask you to lie or misrepresent information to reduce your debt. Not only is this strategy unlikely to work, but it can also land you in legal trouble.

Is credit counseling a good idea?

Credit counseling has many benefits, but it isn’t without its drawbacks. The only way to determine whether credit counseling is a good idea for you is to review your situation and examine how counseling can help you.

Credit counseling may make sense if:

You have a lot of personal loan or credit card debt that can be addressed through a DMP.
You want to consolidate your debts into one regular payment.
You want help creating a budget or advice on money management.
You want help disputing an error on your credit report or simply accessing or reviewing your credit report.

Credit counseling may not be a good idea if:

Your debt is primarily in student loans or secured loans, like a mortgage or auto loan — these can’t be addressed through a DMP.
Your debt is manageable and can be taken care of with debt consolidation or other debt relief options.
You couldn’t afford the payments under a DMP, in which case you may need to explore more serious options like filing for bankruptcy.

Whether you choose to work with a credit counselor or not, keep in mind that debt management is a long process. Your obligations won’t disappear after one credit counseling session, nor will your credit score magically repair itself. But, if you follow the plan, you should start to see your score rise over time, even if it takes an initial hit when you start the program.

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