One of the questions the NFCC receives frequently is how credit counseling affects your credit score. It’s important and great that you recognize the importance of a healthy credit score. A healthy credit rating can help lead to home ownership, auto financing and the lowest interest rates for credit cards. Working with a financial professional is a good way to learn ways that help you manage your debt to get the best results. Simply talking to a counselor about your financial situation during a credit counseling session will not affect your credit rating at all. Your counseling session should be free or low-cost, confidential, and it should help you determine the implications of your current financial situation and what resources and options are available. However, if you decide to take action and follow your counselor’s recommendations, your credit score could be affected indirectly.
What to Expect
So, let’s talk about what you can expect from a typical credit counseling session. During your session, you and your counselor will work together to determine where you stand with your finances and what your needs are. This means that you will conduct a thorough review of your expenses, income, debts, and even review your credit report. But, rest assured, when a counselor pulls your credit report on your behalf, it is considered a soft pull and there is no impact on your score. Your credit score is only affected when you make an inquiry with a lender to solicit new credit, such as a new credit card or a loan.
Also, during your session you will work with your counselor to set your own goals and create a realistic action plan to reach them. The recommendations and action plan that you get will depend on your needs and on the options that are available to you in your current situation. Consumers often talk to credit counselor to get help repaying their debt. And a very common option that credit counselors offer consumers is to enroll in a Debt Management Plan or DMP. A DMP offers consumers a way to repay their debt in full through a credit counseling agency. Typically, credit counseling agencies can negotiate lower interest rates, reduce or eliminate over the limit fees, and, in some cases, reduce the monthly payments.
How a Debt Management Plan Impacts Your Credit Report
So, if after talking to a counselor you decide to move forward with a DMP, enrolling in this plan will have a direct impact on your credit report. In the same way, if you decide to deal with your debt yourself through a self-administered debt repayment strategy, your score could also be impacted. The immediate impact from a debt management plan is usually from closing the accounts that go onto the plan. This could negatively impact your credit utilization ratio, which accounts for thirty percent of your FICO credit score, because closing accounts will reduce your available credit to zero while still having balances. While this does impact it, other alternatives such as debt settlement and bankruptcy are much worse for your credit.
In both cases, it is very hard to know exactly how your score will be affected. But rest assured, evidence from one of our member agencies, shows a group of clients in their first three years on their DMP saw an increase of 106 points. There may be a slight decline at first but then you can expect an increase early in the program. The average scores of those clients went from 529 to 635. Once debts are paid off in full another increase in their credit score is expected. Recovering from credit card debt can take time but a debt management plan can be a safe effective way to take back control of your finances.
The most important thing to remember is that a credit counseling session is an opportunity for you to get financial advice and recommendations from a trusted expert. Your financial situation and your credit score will not change until you act. During your session, your counselor should help you better understand how your credit works and discuss the factors that can affect your score. If you have more questions about your current financial situation, schedule an appointment with a certified credit counselor today. You definitely have nothing to lose and a lot to gain; they are there to help.