Does Credit Counseling Hurt Your Credit? What to Know

If you’re struggling with debt and don’t see a practical way out through making payments, credit counseling can be a valuable tool for getting your finances back on track.

However, many people hesitate to seek help because they’re worried it could damage their credit. It’s normal for you to feel that way. After all, you’ve worked hard to build your score.

The good news is that credit counseling alone will not hurt your score. However, many credit counseling agencies recommend steps like a debt management plan (DMP). Certain elements of a DMP can have both positive and negative impacts on your credit score. Here’s what you need to know before you make a decision.

Does credit counseling hurt your credit score?

Talking to a credit counselor will not appear on your credit report. Meeting with a certified credit counselor can be a valuable step toward wiser financial decision-making, but it’s not a credit event.

If you’ve never participated in credit counseling, the process can feel stressful and mysterious.

During your conversation, the counselor will typically look over your income, expenses, debt, and goals. They will use that information to recommend one or more strategies, which may include a DMP. That’s where things can get a bit more complicated.

A debt management plan doesn’t drop your score on its own, but the secondary impacts of it can lower your score, especially in the short term.

How a debt management plan can affect your credit

Does credit counseling hurt your credit? Unfortunately, it can if it includes a debt management plan. Exactly how can credit counseling affect credit scores?

Closed accounts and credit utilization

One of the biggest ways a debt management plan may influence your credit is by closing accounts. When you work with a debt management plan administrator, they will close accounts to prevent additional borrowing while you’re paying down your balances.

Although this can help you avoid accumulating more debt, it also reduces your total available credit and average age of accounts.

If your remaining balances are high after an account is closed, your score could drop. Eventually, the score will rebound if you pay off the majority of your debt, but this process could take months or years. It’s important to be aware of the short- to intermediate-term consequences of closing accounts.

Account notations from creditors

Sometimes, creditors will make a note on your account to indicate that you are part of a debt management plan. This is especially common if a third-party DMP administrator reaches out on your behalf (with your permission).

While these notes are not negative scoring factors alone, creditors could take that information into account if you apply for a separate financial product from them while on a debt management plan.

Lenders tend to focus more on other factors, though. Some of the most important elements used to evaluate your eligibility for financial products include your repayment history, credit score, and utilization rate.

On-time payment history through the plan

One of the biggest advantages of a debt management plan is that it can help you make consistent, on-time payments.

Payment history is the most heavily weighted factor in most credit scoring models, including FICO. If you’ve missed a few payments before entering a DMP, making all of those payments on time can actually help your score long-term.

With most DMPs, you’ll be making a single payment to the credit counseling agency. This means no more juggling multiple due dates, which helps most people stay current on their accounts. Your score may decline temporarily, but it can bounce back as you progress through the debt management plan.

When credit counseling helps your credit

Most people who sign up for a debt management plan experience a short-term drop in their credit scores. However, many people eventually see improvements in their scores and have less debt to deal with if they see the plan through.

Credit counseling could be a good fit for you if it will help you:

• Avoid missed payments
• Get caught up
• Eliminate recurring monthly payments
• Lower your credit utilization rate
• Prevent accounts from going to collections

Improving your financial habits is just as important as boosting your score. If you are considering a DMP or are already enrolled in one, take time to learn to budget and build an emergency fund.

Credit counseling vs. credit repair vs. credit building

Credit counseling is a financial education service. A credit counselor will typically cover topics like budgeting, money management, and debt repayment.

Credit repair services typically dispute inaccurate information on your credit reports. Legitimate credit repair companies will not guarantee score increases.

Credit building focuses on establishing positive payment habits. For example, Kikoff offers several tools that can add positive on-time payment history to your credit report, which improves your score over time.

How long does credit counseling affect credit scores?

Credit counseling does not impact your score at all, but what you do with that information could influence your score for months or years to come. If you are looking for ways to rebound after a financial rough patch, explore Kikoff’s credit-building tools. Sign up for a free account today.