Does Credit Counseling Have an Effect on Your Credit?

In the broad sense, ""credit counseling"" can refer to any of the educational or debt relief services provided by a credit counseling service. Obviously, taking a voluntary class in budget management will have no direct effect on your credit - although it could help you to improve your credit score if you implement what you learn. But when people talk about "credit counseling," they are usually referring to the debt consolidation or debt management plans offered by consumer credit counseling services.

The debt consolidation services offered by consumer credit counselors seem almost too good to be true. They can take all of your bills, get the late fees removed and the interest rates lowered, and then have all of them coordinated so that you only have to make one, lower monthly payment. There has to be a catch, right?

The answer is "yes," and the major drawback to entering into a debt management plan is that you can't use any of your credit cards or apply for any new ones - or any other types of credit, for that matter. Your objective is to pay off old debts, so you can't take on new ones. But what most people are concerned about is how debt management plans affect their credit.

Does Using Credit Counseling to Consolidate Debts Count as a 'Charge-Off'?

When consumers run up credit card bills that they cannot repay, the card issuer will eventually "charge-off" the account. This means the credit card company gives up on trying to recover the debt and sells it to a third party collection agency. Even if you pay the debt collector, at this point, your credit report will marked with a "charge-off" or "account settled for less than total owed."

The good news is that consumers who enter into debt management plans do not receive the black mark of a "charge-off." But their credit reports are not left unblemished, either. Instead, all accounts involved in the debt management plan are marked "does not pay account as agreed." This is not nearly as bad as a "charge-off" and infinitely better than a bankruptcy, but it still looks bad in the eyes of some lenders - even after you've settled your debts.

Bankruptcy With Dignity - A Thing of the Past

As if people forced into bankruptcy don't feel bad enough, the new law seeks to make them feel even worse. No longer are bankruptcy filers presumed to be honest people who got in over their heads - now they're thought of as likely criminals who are trying to cheat the system, or at best, financial children who need to be taught how to balance their checkbooks. In fact, you now have to enroll in credit counseling before filing either a Chapter 7 or Chapter 13 bankruptcy, and sign-up for a demeaning "budget management" class after your bankruptcy is processed.

Worst of all is the way that the new bankruptcy law turns the traditional lawyer-client relationship on its head. Previously, as with all other matters of the law, your bankruptcy lawyer was your advocate. But with the new bankruptcy law, lawyers are personally responsible for any incorrect information in your filing, which changes their role from ally to interrogator. Now, even your own lawyer will find you guilty until proven innocent, and all of the extra work that he or she has to do verifying your claims takes time and money, which means that lawyers have to charge their bankruptcy clients higher fees.

When Debt Management is Right for You

The truth is that paying your bills on time each month looks best to creditors, but life sometimes gets in the way. Entering into a debt management plan will not leave your credit report untarnished, but you have to evaluate the cost of the alternatives. Can you afford to pay your debts as agreed? Are the late fees and interest rates just too high for you to manage? Could you end up in even worse shape if you don't seek help right away? If so, then debt management - despite the negative effect it may have on your credit score - is probably worth it.

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