Credit Counseling – Your Credit Report and Credit Score
Using the services of a credit counseling agency providing debt management may be reported on your credit report and affect your credit score. Depending on the credit scoring formula and the repayment information reported by your creditors, credit counseling may have a negative affect on your credit score and report.
Credit counseling agencies typically do not send positive or negative repayment history to the major credit reporting agencies. In addition, many credit counseling agencies advertise that working with them will not harm your credit score. These credit counselors are not forthcoming on the long-term impacts to your credit report and score.
The Bad – Negative Credit Reporting by Creditors
When a credit counselor contacts your creditors, the credit counselor offers your creditors a debt repayment plan with reduced amounts to settle the debt and usually include a fee paid to the counselor.
Upon acceptance of the debt repayment plan, almost all creditors close the credit account to prevent you from taking additional debt. Your creditor will update your credit report and indicated the account has been closed by the creditor, not by you. This is negative – in two ways. In addition to the account being reported as closed by the creditor, your credit score will lower as your available amount of credit will decrease.
This type of negative reporting can stay on your credit report for 7 years. Additionally, creditors typically do not reopen closed accounts and prefer consumers to reapply to open a new account.
What you can do. Consumers that have decided to enter a debt repayment plan with a credit counseling agency may contact creditors individually in writing and request the account closed. The negative effect is lessened, as the account will show closed by the consumer although your overall amount of credit will decrease.
Not all creditors will work with your credit counseling agency and the proposed debt repayment or debt management plan. In addition, some creditors may agree to the debt management plan and report the debt as paid in full or 100%, although not paid to the creditor’s initial terms.
No Erasing Your Past Credit History, Negative or Positive.
Credit counseling will not erase your past negative credit history or fix your credit score or credit report. If you have disagreements about items on your credit report, you will need to contact the creditor in writing and dispute those items. Accurate information cannot be removed from your credit report, negative or positive.
The Good – Establish a History of On-time Payments and Improve Your Credit Score
Using a credit counseling service effectively will help establishing a history of on-time payments. Many credit counseling services use a Debt Management Plan where you make one payment to the credit counseling agency and they pay your individual creditors. Especially for those consumers with many creditors and a history of late payments, using Debt Management Plan setup by a credit counseling agency and approved by your creditors, will establish a history of on-time payments.
How Long Before My Credit Score Improves?
Expect 12 months to 24 months of on-time payments to your Debt Management Plan setup by your credit counseling agency before your credit score improves. In addition to making on-time payments to your credit counseling agency, paying off the debt will help increase your credit score.
Credit Score Assistance through a Credit Counselor
Many credit counseling agencies also offer Credit Review or Credit Score Assistance as a separate service to offer suggestions on improving your credit score.
