The Difference Between Credit Repair and Credit Counseling

Credit repair counseling and credit counseling are similar-sounding services with different risks and rewards. Credit repair can help you begin improving your credit score. Credit counseling can stop ongoing damage to your credit report. The following information explains what your credit score is, the difference between credit repair counseling and credit counseling and how to be aware of the risks of each.

Understanding Your Credit Score

Any time you borrow - whether a home loan, auto loan, personal loan or credit card - your lender reports the loan to one of the three main credit reporting bureaus, called Experian, Equifax and TransUnion. Additionally, any negative activity regarding your loans such as late payments, defaults, charge-offs or foreclosures are reported by the lenders as well. This forms your credit history.

Your credit history is the primary factor in computing your credit score, which is determined by the Fair Isaac Corp. The resulting FICO score is a number between 300 and 800. A 760 or above means you qualify for the best rates a lender offers. If your score is 620 or below, you are in the subprime category and will be charged higher rates. The median U.S. score is approximately 720.

What Is Credit Counseling?

Credit counseling is a service for those who are behind on loan payments. It is a quick way to stop the immediate negative effects of a financial crisis on your credit rating. Those who need credit counseling typically are:

  • unable to to make minimum credit car payments;
  • consistently late on debt payments
  • facing action from collection agencies; or
  • unable to make progress in negotiating with lenders on a schedule to repay delinquent debt.

A credit counseling services charges a small set-up fee, about $10 typically, and negotiates on your behalf with lenders. A repayment plan is worked out, and, if accepted by all parties, you pay the credit counseling service which in turn pays the lender. The lender then rebates a small portion of the new payment to the service as compensation for getting your loan payments back on track.

Your late payments already would have had a negative impact on your credit history and score. With a credit counseling service plan, the negative impact stops and most lenders will include in your history the fact that you have taken the initiative to begin repayment.

What Is Credit Repair Counseling?

Credit repair counseling is a longer-term process to remove negatives from your credit history and improve your credit score. With credit repair counseling, it is assumed you have solved short-term problems and are no longer missing loan payments.

A credit repair counseling service charges an upfront fee. They review your credit history looking for mistakes. Correcting mistakes is the only quick fix for your credit history. Negative information stays on your credit history for three years. A foreclosure stays on for seven years and a bankruptcy for 10 years.

Avoiding Scams

Credit counseling has grown as an industry along with the increase in consumer lending in the U.S. Lenders like working with credit counseling services. Be wary of credit counseling services that ask for large upfront payments or that hold or delay forwarding your payments to lenders.

Credit repair counseling services have a worse reputation. Many of these services advertise a quick fix to repair your credit history, but they can only look for mistakes in the history, which you can do yourself. After correcting mistakes, the only way to improve your credit score is to be on time with payments and wait for negative information to drop off.


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