Does credit counseling hurt your credit?

Managing debt can be tough when you’re juggling multiple credit card payments, hefty interest charges and other types of financial stress — but that’s a reality that many Americans are facing in today’s high-rate inflationary environment. As prices have climbed over the last few years, more people have had to turn to credit cards to cover the essentials, and, in turn, credit card debt is rising, and so are the number of payment delinquencies and maxed-out card accounts. 

If you’re one of the millions who’s struggling to stay on top of your bills right now, you may have considered credit counseling as a way to regain control. Many people turn to credit counseling when they feel stuck in a cycle of debt, as credit counseling services can offer guidance on budgeting, debt management and repayment strategies to help you get back on track. The experts who work for these services can also help you negotiate with creditors and provide the financial education you need to avoid similar situations in the future.

But as with any other type of debt relief, there are trade-offs to this type of assistance. One common downside of other debt relief strategies is a negative impact on your credit score. So, you may wonder whether seeking help through credit counseling will run the same risks. It’s a valid question, especially when your credit score already feels fragile and you want to avoid further damage. But does credit counseling hurt your credit? Below, we’ll detail what to know.

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Does credit counseling hurt your credit?

The short answer is that credit counseling itself does not directly hurt your credit score. When you enroll in a credit counseling program, you work with a certified credit counselor who helps you create a budget, understand your debt and explore repayment options. Simply speaking with a counselor or receiving advice has no impact on your credit report.

However, if you choose to enroll in a debt management plan, which is a common service offered by credit counseling agencies, there are a few things to keep in mind. A debt management plan consolidates your unsecured debt into one manageable monthly payment. The credit counseling agency also works with your creditors to negotiate lower interest rates and fees, which can help reduce your monthly payments. While this plan can make your debt easier to handle, it does come with potential drawbacks that could have an impact on your credit score, including:

• Closed accounts: As part of a debt management plan, creditors may require you to close credit card accounts to prevent further borrowing. Closing accounts can lower your available credit, which may impact your credit utilization ratio and, in turn, your credit score.
• Credit report notation: Some creditors may note on your credit report that you are enrolled in a debt management plan. While this isn’t a negative mark, it could be viewed by future lenders as a sign that you had trouble managing debt on your own.
• Missed payments before enrollment: If you’ve already missed payments before enrolling in credit counseling, those late payments will remain on your credit report for up to seven years, regardless of the plan you enter.

That said, many people find that completing a credit counseling program helps them improve their financial situation and, over time, can actually lead to a better credit score.

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What other debt relief options do I have that won’t hurt my credit?

If you’re hesitant about credit counseling due to potential credit implications, there are other ways to manage your debt while keeping your credit score intact. These include:

• Debt consolidation: A debt consolidation loan allows you to combine multiple debts into a single loan with a fixed interest rate. This can simplify payments and potentially reduce interest rates without requiring you to close accounts.
• Balance transfer: Some credit cards offer 0% interest balance transfer promotions, which allow you to move existing debt onto a new card and pay it off over a set period without accruing additional interest.
• Budgeting and DIY debt repayment: If your debt is manageable, you might benefit from creating a strict budget and using methods like the debt snowball (paying off smallest debts first) or the debt avalanche (paying off highest interest debts first) to clear your balances.
• Negotiating with creditors: At times, your creditors may be willing to work directly with you to lower your interest rates or establish a more manageable repayment plan without the need for a formal debt management program.
• Credit counseling without a debt management plan: You can still seek advice from a credit counseling agency without enrolling in a debt management plan. Many agencies even offer free financial education and budgeting assistance.

The bottom line

Credit counseling is a valuable resource for those looking to regain control over their finances, and on its own, it does not harm your credit. However, enrolling in a debt management plan may have some minor short-term effects due to account closures and notations on your credit report. That said, successfully completing a credit counseling program can put you in a stronger financial position and even improve your credit over time.

If you’re struggling with debt, exploring your options — including credit counseling, debt consolidation and budgeting strategies — can help you find the best solution for your situation. Be sure to take action before debt becomes unmanageable, though. By staying proactive, you can work toward a debt-free future while keeping your credit intact.

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Stephen Collopy

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