Q & A: Does Credit Counseling Affect My Credit Report?

by Center for Personal Finance editors

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.

For more information about credit counseling, read the Home & Family Finance Resource Center article, "Seeking Help in a Crowded Field: Check Out Credit Counselors."

June 30, 2003