What Is The Effect of Credit Counseling on Your Credit Rating

Credit counseling may or may not affect your credit rating and depends mostly upon the programme that you enter with the credit counseling service. To say that entering into credit counseling will necessarily ruin your credit rating or have the same impact as filing for bankruptcy is false.

The first thing to understand is that just signing up for credit counseling has virtually no impact on the credit score till the time that you do not control yourself in a debt management plan wherein the counseling service renegotiates the repayment terms with your creditors.

Whenever you enroll yourself for repayment plan with a credit counseling service it is likely to have an adverse impact on your credit score. This is because you are telling your creditors that you are unable to pay back the money it took under the same terms of interest rates as the first agreed upon. Some creditors may not want to do business with you during the time that you are controlled in a debt management plan or even after you have finished it whereas others will on the successful completion.

It is incorrect to compare filing for bankruptcy to entering into credit counseling. Filing for bankruptcy is perhaps the worst thing that can happen to your credit rating. It can stay on your credit report for a period of 10 years and lenders typically will not want to do business with you during this duration. Starting from the scratch to build your credit rating can be difficult for many people even once the bankruptcy filing has ceased to exist on your credit report.

Even for a consumer who has entered into a debt management plan different financial institutions tend to deal with its different league which makes the difference in how your credit score gets impacted. For example, First USA, arguably one of the biggest credit card service providers, reports all the consumers that enter into debt management plan as delinquent for the first three months till the time that they have made three consecutive payments under the repayment schedule. Being reported late delinquent definitely hurts your credit rating and stays on your credit report for a period of seven years.

Another example is that of Citibank which contrasts to the practice adopted by First USA. Citibank simply adds a note beneath the accounts that are being paid off under a debt management plan that states that the consumer is under credit counseling. Such an update on your credit report is not very likely to fall to your credit rating as many lenders have loosened their stance about how they view credit counseling. In fact several of them reports that they view being enrolled in a debt repayment plan as a positive sign that the consumer is trying to get his credit situation under control. Citibank, the largest issuer of credit cards, says that people were fallen behind on the payments often tended to improve this practice in the companies perception by enrolling and finishing a debt repayment plan. They report that people who become part of such plans pose a significantly lower risk of default in the future. This may be partly due to the fact that being involved in credit counseling provides education as to how to manage your finances and use credit wisely.

Credit counseling will do nothing to improve your credit score if you fell behind on your payments before. Once your account has been reported as the default it or delinquent, the record will continue to show on your credit report was repeated of seven years and will affect your credit rating adversely.