The goal of credit counseling is to have an effect on your credit. There is much information on this subject that is circulated by a wide variety of professionals and consumers alike.
The truth is yes, credit counseling does affect your credit. The effects are different than you might expect though.
Enrolling in a DMP Does Not Reduce Your Credit Score
Some bankers and mortgage brokers will mistakenly tell you that signing up for a debt management plan harms your credit. Their
information used to be correct. However, in the late 1990s, Fair Isaac Corporation (the developer of the FICO scoring model)
conducted an in depth study on credit counseling. The results of the study surprised many. Fair Isaac found that despite the heavy financial strain that DMP clients were under, they were no more likely to default on their debts than those who were not enrolled in a DMP. From 1999 on, the DMP enrollment penalty was eliminated from the FICO credit model.
You should also consider the fact that credit counseling does not necessarily involve a debt management plan (DMP). Credit counseling is a service that evaluates your financial situation and credit needs. Our Accredited credit counselors will review your income, expenses and debt information and help you develop a budget. We want to know what all of your financial obligations are so that we can help you develop a strategy for becoming debt free. In addition, we want to make sure that your credit rating improves so that you can benefit from reduced borrowing costs on future purchases. Our first priority is to help you develop a strategy to pay off your debt on your own. If you need a more structured repayment plan, then we can help you with that.
A debt management plan can help reduce your credit card payments, reduce interest rates and eliminate late and over-the-limit fees. Over time, your credit score will actually increase as your debt balances get lower. Your credit score will reflect that you successfully paid off substantial balances. This shows an incredible amount of discipline, which is the core of the FICO credit scoring model.
The next time someone asks you if credit counseling affects your credit score, tell them absolutely. That’s what they were able to do for me. Whether you need a DMP or can get out of debt on your own, credit counseling can help you improve your credit.