Can Credit Counseling Hurt Your Credit?

Does Credit Counseling Appear on Your Credit Report?

If you work with a credit counselor for budgeting advice or basic financial guidance, that won't appear on your credit report at all. The same goes for a free initial consultation: There's nothing to report, so there's no impact on your credit.

It's only when you enroll in a debt management plan (DMP) that your credit report may be affected. A DMP typically involves consolidating your unsecured debts into a single monthly payment, which the agency distributes to your creditors for you. It may also include negotiations with your creditors to reduce your monthly payments and interest rates.

When you repay a debt through a DMP, a creditor may add a note to that account on your credit reports indicating it was paid through a debt management plan. Future lenders can see this notation during a credit check, but it won't directly impact your credit score.

That said, several elements of the DMP process can still impact your credit for better or worse.

Learn more: How Does Credit Counseling Work?

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How Credit Counseling Can Affect Your Credit

Paying off debt through credit counseling involves several moving parts, and some can influence your credit score along the way.

Closing Accounts

A credit counselor may ask you to close your credit card accounts at the start of a DMP. This is typically done to prevent you from adding to your debt while repaying it.

Closing those accounts affects your credit utilization rate, which is the percentage of your available revolving credit you're currently using. When you close credit card accounts, your total available credit drops, which can push your utilization rate higher and cause your score to dip.

Closing accounts can also affect your length of credit history over time. Closed accounts stop aging, which won't hurt your score immediately—positive account information stays on your report for up to 10 years. However, it may slow future credit score growth.

Payments

How your accounts are reported during a DMP has a big impact on your credit. Here's how different payment outcomes can affect your score:

• Paid in full or current: A lender may report the account as paid in full or current, which can have a positive effect on your credit.
• Settled: If your counselor negotiates a lower payoff amount, the account may be reported as "settled," meaning you didn't pay the original balance in full. This typically has a negative impact on your score.
• Missed payments: It's critical to stay current on your payments during the transition to a DMP. A payment that goes 30 days past due will hurt your credit score. Make sure you understand when the agency will begin paying your creditors so there are no gaps in coverage.

Is Credit Counseling a Good Idea?

Credit counseling can be a smart move in the right situation, but it's not for everyone. Here are a few key things to consider:

• It only covers certain debts. DMPs are designed for unsecured debts like credit cards and personal loans. Mortgages, auto loans and student loans typically can't be included.
• Other options may work better. If your credit is in good shape and your debt is manageable, a balance transfer credit card with a 0% intro annual percentage rate (APR) or a debt consolidation loan may be a more efficient route. Just be careful not to continue charging on cards after consolidating, as it can make your situation worse.
• A DMP requires monthly payments. If you can't keep up with a payment plan, more serious options like bankruptcy may need to be considered.
• It's not free. DMPs typically require a setup fee and ongoing monthly fees for the duration of the plan (typically three to five years). Reasonable fees include $50 or less for setup and roughly $25 for monthly maintenance, according to the National Foundation for Credit Counseling. The good news is that fees may be waived if you're experiencing serious financial hardship.

If you're still not sure whether a credit counselor is right for you, set up a consultation with one to get their perspective. While debt management plans cost money, the advice counselors give is free.

Learn more: Is Debt Counseling a Good Idea?

How to Find a Good Credit Counselor

If you've decided that credit counseling is right for you or you want to consult with a counselor about your situation, it's important to find a good one who has your best interests at heart. In general, steer clear of for-profit credit counseling agencies. Nonprofit agencies are more likely to charge lower fees and provide unbiased advice.

The first step is to make sure the credit counseling agency is certified. You can find these agencies through any of the following:

• The National Foundation for Credit Counseling
• The Financial Counseling Association of America
• The U.S. Trustee Program
• Your state's attorney general's office
• Your local consumer protection agency

Once you find a counselor, set up a consultation to discuss your full financial picture. A good counselor will review your income, expenses and debts before making any recommendations. Be cautious of any agency that jumps straight to a DMP without first taking a close look at your overall situation—that's a red flag.

Learn more: How to Find a Good Credit Counselor

Alternatives to Credit Counseling

If credit counseling doesn't seem like the right fit, there are other ways to tackle your credit card debt:

• DIY debt repayment strategies: Methods like the debt avalanche (paying off the highest-interest debt first) or debt snowball (paying off the smallest balances first) let you chip away at debt on your own, without fees or account closures.
• Balance transfer credit cards: If you have good credit, a balance transfer card may let you move high-interest debt to a card with a 0% promotional rate, often for 12 to 21 months. This can save significant money in interest if you pay the balance off before the promotional period ends.
• Personal loans for debt consolidation: A debt consolidation loan lets you combine multiple debts into one fixed monthly payment, often at a lower interest rate than with credit cards. This works best if your credit qualifies you for a competitive rate.
• Negotiating directly with creditors: You can contact your creditors yourself to ask for a lower interest rate, a hardship payment plan or a settlement. Creditors are often willing to work with you, especially if you're at risk of defaulting.
• Nonprofit credit counseling without a DMP: Even if you don't enroll in a full DMP, a nonprofit credit counselor can provide free budgeting advice and help you evaluate your options.

Learn more: How to Get Out of Debt

The Bottom Line

Credit counseling can be a valuable tool if you're struggling with unsecured debt and want a structured way to pay it off. The process itself won't directly hurt your credit score, but closing accounts and the way your payments are reported can have a real impact on your credit history.

Before you decide, get free access to your Experian credit report and FICO^® Score^Θ to get a clear picture of where you stand. Understanding your credit score and what's on your report can help you determine whether credit counseling (or another option) is the right move for your financial situation.