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How Credit Counseling Affects Your Credit Score

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If you’re struggling with debt or a blemished credit history, it might be helpful to schedule a visit with a credit counselor who can provide you with specific steps to get out from under your debt load and improve your credit score.

The good news is that meeting up with a credit counselor won’t negatively impact your credit score, but some remedial steps offered by the credit counselor may temporarily cause a dip, but your score should improve over time as you take control of your financial situation.

How credit counseling can impact your credit

Credit counseling is a service that provides consumers with financial guidance, often given free of charge by nonprofit organizations.

Credit counselors typically begin with a credit report review, which includes pulling your credit report, explaining how to read it and answering any questions you have.

After that, they may also offer debt help, which involves going over your budget and recommending the best debt repayment options for you, which may include a debt management plan, a debt consolidation loan, debt settlement or even bankruptcy, depending on your situation.

Here’s how each of these actions can impact your credit:

Debt management plan

If you choose to enter into a debt management plan with your credit counselor, know that you’ll likely be required to close accounts, which will drag down your credit score. Closing accounts will impact your overall length of credit history, but taking control of your debt should be your first priority.

Debt consolidation loan

This can actually boost your credit score as you’ll be using the proceeds of the loan to pay off high-interest revolving debt, such as credit card debt, which will reduce your credit utilization ratio and the new debt consolidation loan or credit line may improve your credit mix — two important factors that play into your credit score. Plus, you may find that having one payment instead of multiple debt payments is easier to keep track of, reducing the likelihood of late payments.

Debt settlement

If your credit counselor works with your lenders to reduce the amount you owe in exchange for a guaranteed repayment plan, then those accounts will be marked as “settled” on your credit reports, which will drag down your scores and stay on your reports for seven years.


As you can imagine, any bankruptcy is not going to do your credit scores any good and should only be entered into if you’re facing insurmountable financial challenges. However, sometimes bankruptcy is the only option, and know that it will provide relief and protection from creditors. Chapter 13 bankruptcies stay on your credit reports for seven years where Chapter 7 stays on your reports for 10 years.

What to expect when you visit a credit counselor

McKenzie Walsh, a certified financial counselor at the nonprofit AAA Fair Credit Foundation, first shows her clients how to pull a free credit report and then helps them lay out a plan of action for improving their credit. That advice can include short-term solutions, such as disputing inaccurate information, and long-term solutions, such as paying off high balances.

If you’re worried about how these actions might impact your credit, Walsh said you shouldn’t be, as getting out from under a big debt load should take precedence over concern over your credit scores.

“When you seek out a credit counselor,” she explained, “your credit score is most likely only going to go up as long as you follow the advice being given.”

You should know that credit counseling itself will not have a direct effect on your credit score. The credit counselor doesn’t report their activity to the credit bureaus if they are offering simple counsel and advice.

That being said, any action you take as a result of your credit counselor’s guidance, such as entering into a debt management plan or, has the potential to affect your score.

How quickly your score will improve will be different for each person. If your credit history is already riddled with negative activity, it could take months or years for that negative history to fall off your report and your new positive history to outweigh it.

How a debt management plan could affect your credit

While credit counseling itself won’t directly impact your score, signing up for a credit counselor’s debt management plan might.

Credit counselors often offer debt management plans as part of their services, and these programs can cause your credit score to take a temporary hit as the credit counselor may recommend certain actions to help reduce and repay your debt load.

With a DMP, credit counselors will try to negotiate your interest rates and repayment amounts with creditors and outline a repayment plan for you. The repayment process is often simplified — your credit counselor will accept one monthly payment from you and disburse that payment to the appropriate creditors until your debt is paid off. The credit counseling organization will also charge a setup fee of around $50 for this service, plus a monthly fee of around $25. Debt management plans typically take three to five years to complete.

If your credit counselor is able to negotiate a lower repayment amount, the account will show up on your credit report as a “settled account,” and you could see a decrease in your score.

Also, some credit counselors will close your credit accounts if you’re in a debt management plan so that you can focus on paying back your debts, which could also negatively impact your credit score.

Martin Lynch, director of education and compliance manager at Cambridge Credit Counseling, said it’s common for this to cause an initial drop in his clients’ credit scores. His average client loses about 19 points in the first month, he said. The hope is that a temporary drop in score will be worth it in the long haul and that scores will increase once the debt management plan is completed.

If you choose to go through a debt management program, a note indicating this will be added to your credit report. This is a neutral mark, and according to Lynch, it won’t change your credit score. That said, future lenders will be able to see this mark on your credit history. While “their interpretation is anyone’s guess,” he conceded that some might see it as a negative.

Credit counseling vs. debt consolidation

It’s important to note that there’s a difference between credit counseling and debt consolidation.

A credit counselor who offers debt management plans will help you consolidate your payments by acting as an intermediary, while debt consolidation is when you consolidate your debt by taking out a new loan or credit card and using it to pay off your existing debts. In some situations, debt consolidation might be a better option than a debt management plan.

Debt management plans are designed for people who don’t have the money to pay off their debt, so they often involve slower repayment.

Lynch advised against entering into a debt management plan with a credit counselor if you have the financial ability to meet your monthly payments. The best thing you can do for your credit score and your wallet is to pay those debts off in full as quickly as possible, and consolidating your debt at a lower interest rate can help you do that.

Credit repair vs. credit counseling

Credit repair is another service that might sound like credit counseling, but actually offers something quite different.

While credit counseling is typically free unless you enter into a debt management plan, credit repair agencies charge a fee, and they often promise to remove negative marks from your credit report. However, if a mark on your credit report is accurate, the credit bureaus won’t remove it.

Plus, if you do have inaccurate marks on your credit report, you can dispute them yourself.

Walsh explained that credit counseling is more about educating you and giving you tasks to complete yourself, whereas credit repair agencies will take action on their own and charge you for those services.

Walsh always tells her clients not to pay for something they could do themselves. “Make sure that you’re aware of the power you have to make a change before hiring a third-party to do something that might not even take effect,” she said.

Where to find a nonprofit credit counselor

Do your research and look for reputable credit counseling organizations with the proper licensing.
According to the Federal Trade Commission (FTC), most credit counseling services are nonprofit. It’s best to avoid for-profit credit counselors as they may not have your best interests at heart. The FTC also recommends looking for in-person credit counseling whenever possible.

You might be able to find nonprofit credit counseling at your local university, credit union, housing authority, military base or U.S. Cooperative Extension Service branch.

To find a certified nonprofit credit counseling agency, check out those affiliated with these groups:

  • The National Foundation for Credit Counseling (NFCC) is a great place to start. It’s the largest and longest-running nonprofit financial counseling organization in the country, and it can connect you with one of its many NFCC-certified credit counselors for free.
  • The Financial Counseling Association of America FCAA members offer free financial education, counseling and adhere to licensing requirements set by the states in which they offer their services to consumers.

What to watch out for when seeking credit counseling

Scammers often target people in financially vulnerable situations, so seeking credit counseling can put you on their radar. Fortunately, they’re easy to avoid if you know what to look for.

Watch out for these red flags when dealing with organizations that offer credit counseling and credit repair:

  • They ask for upfront payment before they’ve done any work.
  • They make unrealistic promises, such as guaranteeing a certain jump in your credit score or amount of debt forgiven.
  • They can’t answer your questions or explain the specifics of what they’re doing.
  • They hold back information or actively misinform you.
  • They ask you to lie or misrepresent information.

Walsh said that following the old adage of “if it’s too good to be true, it probably is” will help you steer clear of illegitimate services.

Remember that improving your credit will take time, and no one can make specific promises about the results you’ll see.

For example, if an organization tells you it can increase your credit score by 50 points in six months, they probably shouldn’t be trusted. “We know what impacts a credit score,” she said, “but we don’t know the credit algorithm.”

You should also watch out for companies that try to enroll you in a debt management plan right off the bat before offering you any financial education.

According to Lynch, credit counselors should be looking at your income and expenses and helping you to set up a budget well before they start selling programs to you. He also said to be wary of debt settlement companies that portray themselves as credit counselors. The two services are different, and debt settlement doesn’t involve counseling or any attempt to improve your credit.

Again, credit counseling won’t hurt your credit score. And while the actions you ultimately take as a result of that counseling might bring your score down a bit, taking control of your finances and paying off your debt will far outweigh any temporary dings to your credit.

As Lynch explained, if you’re struggling with debt, “your credit score is already compromised.” Your priority shouldn’t be avoiding the loss of a few more points. It should be paying off your debt. Doing so will help both your credit score and your wallet in the long run.


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