Does Credit Counseling Hurt Your Credit?

10/19/2023

Credit counseling is a valuable resource for individuals struggling with debt, but it's common to wonder whether seeking help in this form could negatively impact your credit score. Let’s explore the effects of credit counseling on your credit, compare debt management plans and debt settlement, and cover the benefits of nonprofit credit counseling.

Credit counseling is a service provided by organizations to help individuals and families manage their debt and financial challenges. The process usually begins with a thorough review of your financial situation, including your income, expenses, and debt. A certified credit counselor will then work with you to create a budget and a personalized plan to repay your debts.

The Impact of Credit Counseling on Your Credit

The good news is that credit counseling, when done correctly, typically has a neutral or even positive effect on your credit score. Here's how it works:

Credit counseling itself does not directly influence your credit score. When you enroll in a debt management program, your creditors are usually notified, but this notification is not reported to credit bureaus. It means that your credit report doesn't show that you're participating in debt management.

As you follow your credit counselor's advice and make on-time payments through a debt management plan, your payment history can improve, which is a significant factor in your credit score. This can gradually boost your credit score.

A debt management plan often leads to lower interest rates, waived fees, and a structured plan to pay down your debts. This can reduce your outstanding balances over time, further improving your credit score.

Credit counseling provides valuable financial education, helping you develop better financial habits, which can have long-term positive effects on your credit.

Debt Management Plans vs. Debt Settlement

While credit counseling and debt management plans typically have a positive impact on your credit, debt settlement is a different approach.

Debt Management Plans (DMPs): In a DMP, credit counselors work with your creditors to negotiate lower interest rates and monthly payments. You make single monthly payments to the counseling agency, who then disburses the funds to your creditors. DMPs have a more favorable impact on your credit because you're making regular, on-time payments to your creditors.

Read more: Debt Management Plans

Debt Settlement: Debt settlement, on the other hand, involves negotiating with creditors to settle your debts for less than what you owe. While this can provide relief from high debt balances, it can have a negative impact on your credit because you are not repaying the full amount owed.

In fact, the IRS will count the portion of your debt which is forgiven in a debt settlement as ‘income’ and will tax you on that amount.  This can lead to a nasty surprise in the form of a tax bill when tax time comes around.

The Benefits of Non-profit Credit Counseling

Non-profit credit counseling agencies are organizations that exist to provide assistance and education rather than profit. Some key advantages of non-profit credit counseling include receiving objective advice.  Non-profit agencies are typically focused on helping you with your specific situation.

Navicore’s credit counselors are certified and well-trained to provide expert guidance and financial education. We are dedicated to helping you build the skills to manage your finances effectively, ensuring your financial health even after the counseling is complete.

Credit counseling is generally a positive step for your financial future It can help you improve your credit score by providing a structured plan, lower interest rates, and valuable financial education. When choosing a credit counseling agency, non-profit organizations are often the best choice due to their focus on your well-being and their commitment to providing affordable services. Remember that while credit counseling can help, it's essential to follow the plan diligently and practice good financial habits to achieve lasting financial stability.

If you are struggling with your financial situation, you may benefit from credit counseling with a Navicore certified credit counselor.  To get started, click here.

 

 

 

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