on January 10, 2012
Prevailing Wisdom is Not Always Correct
Before I wrote this article, I did a quick google search for Does Credit Counseling Hurt Your Credit and I learned 2 things.
1. That the prevailing wisdom (if that is what we are calling the first page of Google these days) seems to indicate that no, Credit Counseling also known as a Debt Management Program (DMP) does not Hurt your Credit Score.
2. Prevailing wisdom is not always an accurate source for information.
Many people think that a DMP will not have a Negative affect on ones Credit
It appears that when FICO first introduced their scoring model in 1989 it would include the fact that a consumer had enrolled into a Credit Counseling Program (DMP) as a negative event in its scoring algorithm. In 1998 FICO made a change to ignore this event from the scoring model. Thus the myth that Debt Management programs will no longer have a negative affect on ones credit score prevailed.
How Does Credit Counseling Hurt Your Credit?
While the fact that a consumer is enrolled into a DMP program is not specifically factored into the credit scoring model, the effects of the program will be. For instance, when you enroll into a Consumer Credit Counseling program, your credit cards will be closed and all available credit on the enrolled cards will be zero. It has been well established that the amount of credit available is a major component to the scoring model.
When your cards are closed you will still show all of the outstanding debts with no further credit available. This will certainly have an affect on your credit score. Also some creditors will indicate on your credit report that you are enrolled into a program to help pay off the debt at a reduced rate. While this indication will not affect your credit directly, it will certainly affect your ability to borrow money.
Should I Avoid Credit Counseling because my Credit Will be Affected?
No. If you are currently paying high interest rates, and looking for Debt Solutions Speaking with a licensed Credit Counselor about your situation is an advisable thing
to do. Even though a Credit Counseling program will have an affect on your credit score, the effects of falling behind on your payments to your creditors would likely be much worse.
As you make your payments in the Credit Counseling program you should likely see an improvement in your overall credit score as the debt gets closer to being paid off. Also remember that speaking with a qualified Credit Counselor about your situation will not have any negative affect at all on your credit. To speak with a Credit Counselor about whether or not a CCCS program would be appropriate for you, contact Consolidated Credit at Best Credit Counseling Programs .
Like with anything else, it is best to learn all the pros and cons of a Credit Counseling program to determine if it is the right solution for your debt situation. In most cases, if you are feeling pinched by your debt repayments, you should be more concerned with getting the debts paid off, than on how a strategy may or may not affect your credit score.
Credit Counseling Does Affect Your Credit, but not as Badly as Debt Settlement or Bankruptcy
When compared to a Credit Card Debt Settlement or a Bankruptcy approach, a Credit Counseling program will typically be the least damaging to your credit score because with a Credit Counseling program you will stay current on your debts and pay off the debt in full when the program is completed.
So although not as damaging as the alternatives, a Credit Counseling program will temporarily hurt your credit score and I don’t feel that the articles on the first page of Google do an adequate job of explaining this fact. However by clicking 1 or 2 of the social media share buttons below, you can help me get this information on the first page of google rather quickly, and help to correct a flaw in the prevailing thought that Credit Counseling will not hurt your credit.
Magellan had to circumnavigate the Globe to help change the prevailing wisdom of the day and all I have to do is ask you to click a button. Anyone else think Google has made us soft?