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". A 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 many 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.

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 - may be worth it.

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