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How Credit Counseling Can Affect Credit Scores

by | Aug 25, 2023 | News

Credit counseling is a valuable service provided by certified financial counselors who assist individuals in understanding their credit and effectively managing their debt. Many people seek credit counseling when they are facing financial difficulties or simply want to improve their money management skills. Let’s explore how credit counseling can potentially influence your credit scores:

1. Initial Consultation: It’s important to note that consulting with a credit counselor has no impact on your credit score. During the initial meeting, the counselor will typically assess your financial situation, including reviewing your credit report. This review is classified as a “soft pull,” which does not affect your score.

2. Debt Management Plans (DMPs): If you and your counselor agree that pursuing a debt management plan (DMP) is the best approach, there may be certain implications for your credit:

– Account Closure: As part of the DMP, creditors may choose to close or temporarily suspend your accounts. Closed accounts can influence factors such as your credit utilization ratio, which plays a role in calculating your credit score.

– Notation on Account: Creditors might make an entry on your credit report indicating that you’re participating in a DMP. While the actual notation itself doesn’t have an impact on your credit score, potential lenders may perceive it differently. Some lenders might interpret it as a reflection of responsible financial management, while others could see it as a potential risk.

– Payment History: Your payment history plays a significant role in calculating your credit score. If your Debt Management Plan (DMP) involves negotiating lower payments or modifying payment terms and you consistently meet those agreements, it can positively affect your credit over time. However, missing a payment can have a negative impact on your score.

3. Long-term Effects: Successfully completing a DMP can have positive long term implications for your credit health. Gradually paying off debts and demonstrating good financial habits over time may lead to an improvement in your credit score. It is important to note that a DMP differs from debt settlement, which can significantly damage your credit standing.

4. Education and Financial Literacy: One of the primary advantages of credit counseling is the opportunity to gain valuable financial education. By understanding how credit functions and acquiring better money management skills, you can make more informed decisions going forward, indirectly benefiting the improvement and maintenance of your credit score.

5. Other Factors to Consider: It’s important to keep in mind that while credit counseling may have some influence on your credit score, the more immediate concern for most people is the overall burden of debt. Addressing this issue and striving for a more sustainable financial future often carries more weight than the potential short term effects on a credit score.

To sum up, the direct impact of credit counseling on credit scores is generally minimal. However, the decisions made during the counseling process, such as enrolling in a Debt Management Plan (DMP), can have both positive and negative consequences. Nonetheless, the main objective of credit counseling is to assist individuals in managing and overcoming their debt, which for many outweighs any temporary fluctuations in their credit score.