One of our readers, Sharon, sent us this question:
I am considering credit counseling services. Someone told me if I decided to go through with the program, it could impact my credit – making it worse than bankruptcy. Is this true? I’m having a hard time believing it is, but I’d like to get another opinion. Thanks
Thanks for your question! There is not really a simple answer to this question, because it depends on the credit counseling service that you use. Just using a credit counseling service by itself will not hurt your credit score. Meaning that when you go, and sign up to have them help you manage your debt repayment, it will not show up on your credit score.
However, many credit counseling services can definitely damage your credit score as they attempt to negotiate your debt.
Here are the facts:
When I worked in collections for Providian Financial, we were allowed to negotiate settlements, balance reductions, remove interest, late fees, and over the limit charges. The normal customer service reps were not allowed to do this though.
What that means is that you usually have to be past due, and sometimes seriously past due on your credit cards to get many of these benefits. Credit counseling agencies know this, and it is a pretty common practice for them to hold the money you give them until you are seriously past due, and then negotiate a deal with your credit card companies.
So, yes, doing things that way will definitely hurt your credit score – sometimes more than a bankruptcy does. A bankruptcy is one incident as far as your credit score goes, and it is followed by an immediate reduction in what you owe. So while yes, bankruptcy hurts your credit score, months and months of late payments on several accounts can actually hurt it more.
Before you go to a credit counseling service, it never hurts to get all of your paperwork together, and contact the companies that you owe money to. Tell them you are considering credit counseling, or possibly bankruptcy. Ask them what they can do to help you.
All credit card companies have a policy for removing late fees, over the limit fees, accepting settlements, etc. If you take the time to find out what the policy is, and ask them to remove those fees, then you can probably handle the issue without a counseling service.
However, if you have a lot of accounts that have already been sold to collection companies, then you are probably better off just going to a credit counselor. They have a lot of experience in negotiating settlements with collection companies, and it will save you a lot of time and headaches.
Just be sure that whatever counseling agency you choose, that you understand their policy on debt repayment. Ask them if they plan to hold your money, and for how long? The last thing you need is to have months and months of bad marks going on your credit report while you are trying to do the right thing and resolve your debt.
Thanks for your question!
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