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Counseling: How It Affects Your Credit Report

By Faye Mergel
Published: Friday, September 25th, 2009

Creditors inform credit reporting agencies (CRAs) about debtors who participate in debt counseling programs. Joining in such programs can help consumers manage their debts better, but it adversely affects the creditworthiness of a person.

How Counseling Affects a Credit ReportCounseling involves teaching consumers how to manage present debts and how to avoid incurring more debts in the future. This is done by private individuals in exchange for a fee.  Counselors also help consumers pay off their debt through the solutions they provide. This solution is called a debt management plan (DMP).

A debt management plan is a negotiation between creditors and credit counselors. This process usually involves counseling professionals negotiating terms with creditors. Reduction of payments, interest rates, and other fees will be some of the things counselors will request from creditors.

Fair Isaac Company (FICO) says that counseling programs do not affect the creditworthiness of a person. However, creditors report consumers who engage in counseling to the credit reporting agencies (CRAs).  Equifax, Experian, TransUnion, and other CRAs will then place such remarks under a consumer’s credit report. Unfortunately, this will make a person less creditworthy. Creditors assume that a person who takes up a debt counseling program and who requires a DMP to manage his debts as a greater risk.

People who belong to the higher risk levels will have difficulty in applying for a home or car loan. They are also most likely to be denied unsecured credit (those which do not require collateral such as regular credit cards). 

However, not all consumers who participate in a debt management program are reported by creditors. People who show sincere effort in paying back their debt are considered by some creditors as exemptions. Lenders do not report consumers who make three consecutive payments after participating in a program.  A person can also explain in his credit or financial report why he needed to join debt management counseling. This way, he will be given more consideration when he applies for new loans.

Consumers should also keep in mind that help is not only available through counseling programs.  Online resources from reputable financial websites provide helpful tips on how to settle balances and seal off debts. Mymoney is one company that offers financial literacy. The debt or credit help page of the New York state website is another valuable resource for debtors.  Help is not only limited to the Internet. Even friends and family members can offer valuable advice. However, consumers must remember that it is not just the help that they get, but also their determination that can make their financial lives better.

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