The Effect of Credit Counseling on Your Credit Rating

With credit counseling, you work with a service that negotiates a repayment plan with your lenders when you’ve fallen behind on payments. With a reputable service and a plan you stick to, you can begin to repair damage to your credit rating. But you must be certain you are working with legitimate credit counseling service or you could do more harm than good.

Your Credit Rating

Everyone who borrows has a credit history with the three main credit reporting bureaus: Experian, Equifax and TransUnion. Lenders report any borrowing you do and any negative activity such as late payments. This credit history is a major component of your credit score, computed by the Fair Isaac Corp. and called you FICO score. It is a number between 300 and 800 with 720 as the median U.S. score. A score of 760 or above qualifies you for the best rates a lender can offer. A score of 620 or below classifies you as a subprime borrower, and you will be charged a rate about three percentage points higher, at least, than the best borrowers.

Your Score Is Already Affected

If you can’t meet minimum credit car payments, are consistently late with some debt payments, are being called by collection agencies or are at an impasse in negotiating a repayment schedule with your lender for delinquent payments, you need a credit counseling service. And by the time you need the service, your credit rating has already been negatively impacted.

Even one loan can lead to multiple impacts on your credit history. For example, if you are late on a payment, that is reported. If that loan is charged off by the lender, that is reported. If they turn the account over to a collection agency, that is reported as well.

Each bit of negative information stays on your credit report for three years.

A Credit Service Plan Can Help

Most lenders will make a note of your credit counseling service plan in your credit history. Lenders like reputable credit counseling services because working with them improves the chance you will get current on your loan. In fact, in most cases, the lender rebates part of your payment to the credit counseling service as payment for getting you on track.

The lender sees your willingness to work with professionals to get your finances in order as a positive. And that positive mark on your credit history is visible by any other lenders from whom you might try to borrow in the future.

The Wrong Service Can Do Harm

Be aware that when working with a credit counseling service, the service negotiates a repayment deal with your lenders. If accepted, you begin paying the credit counseling service which in turn pays the lender. If your service delays payments - and some collect your first payment to them as a fee - you are adding negative information to your credit history and further lowering your credit rating.

Be certain your credit counseling service forwards your payments immediately and does not get your further behind.

Watch for Scammers

Consumer debt has increased in the United States and the number of credit counseling services has increased with it. Some of these “debt reduction services” charge hefty fees up front and do nothing for you, leaving you further behind in your payments. Others delay paying your lender on your behalf. Work with an accredited credit counseling service to avoid making a bad situation worse.




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