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In the ongoing discussion of credit scores, it a common belief that credit counseling does not impact the consumer credit score. In fact, some credit counseling companies make the claim that their services do not affect your “Fico Score.” This is normally not an accurate claim. If you had available credit on your accounts, when you enroll in credit counseling, all of your accounts are closed by the creditors. This leaves you with “no available credit” on those accounts and reduces your credit score. Having maxed out credit cards can also be detrimental to your credit profile. The NFCC states “A DMP [Debt Management Plan] could have a negative impact on a credit worthiness decision by a potential creditor, landlord, or employer because it is an indicator that you are or have experienced financial difficulties. In addition, creditors may report that you are on a DMP and are not paying as originally agreed although they have accepted the reduced payment.” In other words, if you ask an auto dealer or mortgage company, they may tell you they consider credit counseling similar to a bankruptcy. Please visit the following links for more information: National Foundation for Credit Counseling
Debt Settlement is very different from Credit Counseling. With debt settlement the principal balances of your credit cards are negotiated and settled at a lower balance. This means that you typically repay less than the balance.
By contrast credit counseling programs do not negotiate your balance, they reduce your interest rates, though not all creditors may give you a reduction. There is data that shows fewer people graduate these programs because the payments are often about the same as making minimum payments. Also the debts are typically paid down – usually over 5-7 years, which can be faster than just making minimum payments. Although they may claim to be non-profit, credit counseling companies are paid by the creditors themselves for collecting the debt on top of the fees they charge the consumer. In the past, many have had their non-profit status revoked by the IRS. Here is an article from the Washington Post that talks about this issue.
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