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Is Debt Management & Credit Counseling Bad for Your Credit?

In Debt (4 Comments)

Will credit counseling hurt my credit?

To help you understand the potential impact it may have on you, please consider some facts about a Debt Management Program (DMP) and credit reporting.

Is Debt Management & Credit Counseling Bad for Your Credit?

Before we answer this question, however, let’s define three services most people commonly mistake as the same:

1. Credit Counseling

This service typically consists of a nonprofit agency reviewing a list of your creditors, analyzing your monthly spending plan and income, and providing financial education and a list of possible solutions to pay back your debt.

2. Debt Management Program

This service is typically offered after the credit counseling session if the client qualifies. The benefits of this program include: one, low monthly payment, reduced interest rates, and becoming debt-free in three-to-five years. The consumer makes payments to the agency each month, who then disburses all payments to the consumer’s creditors. Payments continue each month until 100% of the debt is paid back.

3. Debt Settlement or Debt Negotiation

This service is typically offered by for profit companies. The benefits of this program include: one, low monthly payment, paying roughly 50% of what you owe, and becoming debt-free in typically two-to-three years. The consumer makes a payment to the agency each month; however, no payments are disbursed until a settlement of the total balance is reached. Most creditors will only settle the balance if the account is seriously past due (usually six months or more). Therefore, this service will have a negative effect on your credit as it requires you to become delinquent with your debt.

Now that we’ve defined those services, let’s return to the original question, “Will credit counseling hurt my credit?” No.

Participating in a credit counseling session, in and of itself, won’t negatively impact your credit. Credit counseling agencies, like DebtWave, do what is considered a “soft pull,” which does not affect your credit.

So, the question you’d really like to have answered is, “Will enrolling onto a Debt Management Program (DMP) hurt my credit?

Here are five facts to help you understand the credit effect of a Debt Management Program:

1. A Footnote Does Not Affect Your Credit Score

According to Experian, participating in a Debt Management Program does not affect credit scores directly. Some credit card companies will place a footnote on your credit report, stating that you are enrolled in a Debt Management Program, but it should not impact your credit scores in any way.

2. Closing Accounts Could Be Harmful

When enrolling onto a Debt Management Program, the creditors require that each account is closed. When an account is closed, it may affect your FICO score. Because 30% of your FICO score is based on your debt-to-credit ratio, closing down lines of credit can increase this ratio, ultimately lowering your credit score. But, if you are already maxed out or close to being maxed out on your accounts, then this shouldn’t affect you as much. If you are concerned with your credit score, it is recommended that one account with available credit remains off the program.

3. Payment History Remains Important

Since payment history is the most important factor in calculating your credit score (35% of FICO score), it is recommended to keep accounts current before, during, and after enrolling onto a Debt Management Program. If you are unable to keep your accounts current during this time frame, your creditors may report you past due. But typically, creditors only report you past due when you become more than thirty days late.

4. Credit Scores May Increase in the Long-Run

The average credit score for clients entering DebtWave’s Debt Management Program in 2016 was 608. And, the average credit score for clients a few months before completing their Debt Management Program in 2016 was 714. There’s no guarantee that your score will increase. But, our research shows that most clients who have committed to making on time, monthly payments for a three-to-four year period on our program have seen their credit score increase over time.

5. Put the Focus on Getting out of Debt, Not Your Credit Score

The primary purpose of a Debt Management Program is to get you out of debt, not to improve your credit rating. Credit can be defined as the ability to borrow money. For most people with a lot of debt, borrowing more money is the last thing needed. A quote from “Rich Dad, Poor Dad” explains it best, “More money seldom solves someone’s money problems. Intelligence solves problems. There is a saying a friend of mine says over and over to people in debt. If you find you have dug yourself into a hole… stop digging.”

About the Author

Author: DebtWave
Bio: DebtWave is a nationwide, nonprofit credit counseling agency that can help reduce your interest rates and payments and pay off your credit card debt within 3 - 5 years. Help is just a phone call away. Call us today at (888) 686-4040 to schedule your free, personalized credit review or contact us with questions.

Comments

  1. Angie says

    February 22, 2016 at 3:08 am

    With debt wave are we forced to stop making payments until we get our dmp in place?

    Reply
    • Mike Marsden says

      February 22, 2016 at 2:38 pm

      No. We encourage our clients to continue making minimum payments (if possible) until the debt management program is set up.

      Reply
  2. Maggie Allen says

    April 12, 2016 at 2:13 pm

    Thanks so much for sharing! I think it is really awesome that the credit counseling doesn’t directly impact your score. It shouldn’t either; people who take initiative by going to these counselors shouldn’t be docked for attempting to have control over their debt. In my opinion, that would just be counter-intuitive for the creditors.

    Reply

Trackbacks

  1. 9 Questions to Ask a Credit Counseling Agency Before Enrolling says:
    November 25, 2019 at 11:01 am

    […] can be temporarily affected while you are in a debt management program as some creditors close out your accounts once you join […]

    Reply

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