A consumer seeks out consumer credit counseling services when he finds himself struggling with debt -- a situation which may have already wreaked havoc on his credit score. Utilizing the services of a consumer credit counseling service usually has no further negative impact on your credit score. However, the decisions you make in relation to the service and your debt can have a negative effect.
What to Look For in an Agency
Look for a reputable credit counseling agency that is designated as not-for-profit. The best place to search for this type of resource is through the website for the National Foundation for Credit Counseling. Plan on spending approximately $50 to enter the plan and $25 to $35 a month to maintain the plan, says financial expert Michele Singletary in her article entitled, "Finding a Good Credit Counseling Agency." Stay away from agencies that try to charge an exorbitant fee, such as thousands of dollars, for setting you up in a debt management plan and maintaining the plan.
Debt Management Explained
A debt management plan, also known as a "DMP," involves a credit counselor speaking to your creditors, on your behalf, to negotiate lower interest rates and more affordable payments. You make one payment to the agency each month, and the agency divides the payment among your creditors, according to the payment arrangements he negotiated for you. As payments are made on time, creditors report your account to the credit bureaus as being "paid as agreed" with no negative impact on your credit score. You continue making payments to the agency until your creditors are paid in full. A DMP can take three to five years to complete, according to credit expert, John Ulzheimer, in his article, "Ask the Expert: Does Credit Counseling Hurt My Credit Score?"
Debt Settlement Explained
Debt settlement consists of you agreeing to pay a lump sum -- usually a percentage of what you owe -- to a creditor, in exchange for having the debt settled. Debt settlement is noted on your credit reports as a settlement accepted by a creditor or as a partial payment. Unfortunately, credit scoring models consider either notation as negative. However, if your account is severely delinquent or defaulted, your credit score is already damaged and settling will have little, if any, additional negative impact to your score.
Events That Can Negatively Affect Credit Scores
Making partial payments to your creditors or settling your debts by paying a lump sum -- equaling less than what you owe the creditor -- can have a negative impact on your credit score. In addition, if you fail to make funds available to the agency to pay your creditors on your behalf on time, or the agency fails to make the payments on time to your creditors, your credit score can suffer.
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