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Is Credit Counseling Right for Me?


By: Kristen J. Welcome
Published: April 2006

For many, credit counseling seems like the ideal solution. If you’ve been fielding harassing phone calls from collection companies and could use some help negotiating lower payments and sorting out your debt, these companies sound like a dream come true. Before you decide to use a credit counseling service, however, here are a few things you should know about these services.

One fact that often surprises people about credit counseling services is that your use of these services will most likely be reported to the major credit bureaus and be included on your credit report. Although intuitively this sounds like it might be helpful to your credit, your use of a credit counseling service can actually damage your credit score. The major credit bureaus, in determining your credit score, will actually lower your credit score based upon your use of a credit counseling service. Why? Although use of these services demonstrates that you are proactive in attempting to get your debts paid in a responsible manner, it also demonstrates that you have gotten in over your head and require outside help to sort everything out.

For this reason, credit counseling is not for people who have the ability to negotiate lower payments with creditors without help, and can put themselves on a responsible payment plan. It should not be used as a “personal assistant” to keep track of payments that you don’t want to bother with; the damage to your credit score is not worth the convenience of having someone else talk to your creditors for you. Credit counseling is meant to be used by people who are absolutely overwhelmed with debt, who do not wish to file bankruptcy, and who have no choice but to sacrifice their credit in exchange for debt help.

The good news is that use of a credit counseling service is not quite as detrimental to your credit score as a bankruptcy. The bad news is that if you are unsuccessful after using the credit counseling service and must file bankruptcy anyway, the credit counseling and bankruptcy together on your credit report will be an absolute disaster. Therefore, if you decide that credit counseling is appropriate for you, check out the company thoroughly. Contact the Better Business Bureau and do an online search for any reviews about the service. Make certain that a credit counseling service will meet your needs before you commit to their services.

Another difference between credit counseling and bankruptcy is that credit counseling usually involves negotiated lower payments to your creditors. In bankruptcy, your debts to creditors are either wiped clean (as in a Chapter 7 bankruptcy) or paid at cents on the dollar (as in a Chapter 13 bankruptcy). With credit counseling, although your payments will be lower, you should know that your creditors will eventually be paid what they are owed. For many people, this makes credit counseling an appealing choice because they don’t want to deny their creditors the amounts they are rightfully owed; they just need some slack in order to make the payments.

Finally, many people have a negative emotional reaction to the idea of filing bankruptcy. It may be easier to explain to family and friends that credit counseling is helping you sort out your debt, rather than explaining why you have filed bankruptcy.


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