One of the most common questions that credit counseling California customers have is whether or not credit counseling will affect their credit score. Many people who are seeking credit advice are understandably concerned about their credit score, and don’t want it to be affected negatively. The short answer to this question is that, no, credit counseling does not hurt your credit score. But the long answer is that sometimes it can, but only in certain scenarios. Here’s some information that you need to know.
What Exactly Is Credit Counseling?
Understanding how your credit score can be affected means understanding the difference between credit counseling and Debt Management Programs (DMPs). Credit counseling involves visiting a certified credit counselor, who will help you to develop a financial plan that includes budgeting, paying off bills, and staying financially strong. This service has no effect on your credit score whatsoever. In fact, you can visit a certified credit counselor as many times as you want without worrying about these visits showing up on your credit history. The only reason that people do run into problems with their credit score is when they are referred to a DMP, although, as you will see below, this can only affect your credit score in certain situations.
What Is a Debt Management Program?
A DMP is a program when a credit counseling agency helps an individual to repay their debts by arranging monthly payment plans, requesting reduced interest rates from lenders, waiving penalties and fees, and so on. As opposed to credit counseling, participation in a DMP will show up on your credit history. But here’s the catch: in most situations, the effect is neutral, meaning that participating in a DMP still won’t hurt your credit score.
How Your Credit Score Gets Hurt
The only way that your credit score can be affected by participation in a DMP is through the actions recommended by the credit counseling agency. For example, if a credit counseling agency recommends that you make less than the minimum payment on a certain account each month, this could end up hurting your credit score.
What Are the Alternatives?
While DMPs are a common course of action for people with large debts to repay, there are other alternatives. In most cases, however, these alternatives will hurt your credit score more than participation in a DMP will. For example, opting for debt settlement or bankruptcy means that you end up paying back less than the full amount owing. This will definitely show up on your credit history, and not in a positive way.
Even when people have large debts, most creditors will prefer to see people in DMPs rather than declare bankruptcy or miss out on payments. Why? Because participating in a DMP means that you are taking control of your debt and making every effort to pay back all that you owe. For this reason, DMPs are seen as “neutral” by credit agencies. So, don’t miss out on the chance to take part in credit counseling just because you’re worried about your credit score – in the end this service will usually make your credit score look better rather than worse.