Does Debt Counseling Affect Credit Ratings?

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Does Debt Counseling Affect Credit Ratings?
Authorities comment on debt counseling affecting credit ratings.

Jim Young of Accelerated Debt Consolidation has assisted me on a few recent articles. He, along with other notable resources, have come together to help answer the oft asked question, "What is the affect on my credit score and credit rating if I use a debt counselor?"

I recommend readers also review my recent articles Understanding Debt Consolidation Programs and How To Find The Best Consolidation Loan.

Accelerated Debt Consolidation - When delving into this question of debt counseling versus credit ratings, I found Jim Young's opening e-mail remarks to me frank, to the point, and offering similar thoughts as my own:

"It is amazing each and every day for the last 6 years that so many prospective clients call with a very similar scenario.

Most of the time the main concern is how credit counseling will affect their credit and ability to get more of it. It is obvious that when one has $70,000 in credit card debt at 23.9% with a pre tax income of $100,000, more credit is the last thing that they need."

Jim continued in his message to me about the insanity of such events along with how long such debt would take for payoff. I had written an article a couple years ago on this exact same material called Consolidation and Balance Transfer. I recommend the faint of heart not read the horrifying statistics contained in that article.

Jim went to the heart of the question with the following comments: "The truth is that when creditors report "credit counseling" or "DMP" on a consumers credit report, IT DOES NOT PERMANENTLY DAMAGE THEIR CREDIT! In fact the entry does not in most cases even drop their score. It is put there to prevent them from getting additional REVOLVING credit while in the program.... THIS IS A GOOD THING !

"What very few consumers know is that being in a credit counseling program CAN ACTUALLY ENHANCE THE CLIENTS ABILITY TO GET MORE CREDIT! When a client has been with us for a year or longer we can actually get them approved for mortgages and 2nd mortgages. We do it every week for our clients that have been with us for a significant period.... What everyone needs to understand is that credit counseling by design is for PRESERVING CREDIT not destroying it.

"What people have to realize is that when they find themselves in this position in many cases they have both a credit problem and a spending problem. The only way they can get over it is to take action and ABSTAIN from the use of revolving credit. Committing to a debt management repayment plan is a commitment that requires some discipline and perseverance. [Creditors] SHOULD stop them from obtaining more credit cards. All of the major creditors are in agreement that clients of debt management programs should be able to keep one or two accounts out of the program for business and travel, so nobody is saying that they should be cut off from the convenience or necessity of credit cards entirely.

"The 'credit counseling entry on the report can be avoided in some cases by following our instructions for properly closing the accounts prior to beginning the debt management program. Some creditors like Discover, Providian and Household will report each and every time a client goes into debt management whether they close the accounts first or not. Citibank in most cases will not report if the account is closed first. Sometimes they do but usually when they receive a proposal from us they go into the system to close the account and if they see it is already closed by the consumer they will not enter anything on the report. This could change in the future but it really doesn't matter when you really understand what the "Credit counseling" entry is all about."

Bankrate.com - Bankrate.com offers: Will debt-counseling affect my credit? "Using a debt-management plan to pay off debt won't hurt your credit score, but it may make it difficult to qualify for new credit.

"When you enroll in a debt-management program, you write a monthly check to a credit-counseling agency and the agency pays your creditors. A debt-management plan usually lasts three or four years. A comment stating that you're paying an account through a credit-counseling agency appears on your credit report and remains until the account is paid in full. Such a comment won't hurt your credit score in the least.

"However, if you get involved with a debt management agency that is late making payments to your creditors -- or doesn't make any payments at all -- your credit will be damaged."

Additional comments from noteable resources.

CUNA's Home & Family Finance Resource Center - CUNA offers Q & A: Does Credit Counseling Affect My Credit Report?

"Question: I think I need professional help getting out of debt, but I've heard that seeking help will affect both my credit report and my chances of getting a loan. Is this true?

"Answer: It depends on whether you use credit counseling, debt repayment, or debt settlement. But keep in mind, the credit consequences of not seeking help are far worse.

"Credit counseling--help with financial planning or help creating a budget--does not affect your credit rating or your credit report.

"But many credit counseling agencies will set up a debt repayment plan, where they contact your creditors and negotiate lower interest rates so you can fully repay your debts.

In this case, some creditors may put a note in your credit report saying you're participating in a debt repayment plan, but that note is removed once you've completed the plan. (To be safe, follow up with the credit bureaus and make sure your lender has removed that note once you've finished repaying your debt.) Furthermore, the leading credit scorer--Fair, Isaac & Co.--does not include that information when computing your credit score. However, while that notation is on your report, it's up to lenders to decide whether they view it as a positive or a negative. You can make a case for yourself that you had a problem and are successfully addressing it.

"Debt settlement services, on the other hand, will affect your credit report. A debt settlement service asks your creditors to accept less money than they are owed and, if they accept the terms, creditors will note that on your file. This notation will stay on your record for seven years and will lower your credit score."

MSN Money - offers an excellent article entitled Consumer"s Guide To Credit Counseling.

Besides suggesting answers such as when should you use a credit counselor, this article offers the following key paragraph:

"What counseling can do to your credit - Here's another controversial topic. You may have heard that credit counseling will trash your credit report or even that it's "worse than bankruptcy." Neither is really true.

Credit counseling may have some effect on your credit, or it may have none at all. Some lenders may not want to do business with you after you've completed your plan, but others will.

Contrast that with a bankruptcy, which is viewed by almost all mainstream lenders as a huge negative on your credit report. These lenders, who prefer to deal with consumers with good credit, typically won't do business with you for the 10 years the bankruptcy remains on your file.

What happens to your credit during counseling largely depends on how your lenders report your account to the credit bureaus."

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