How Does Credit Counseling Affect Your Credit Score?

Understanding How Credit Scores are Calculated

Credit scores represent a numerical assessment of an individual’s creditworthiness, primarily used by lenders to gauge the risk associated with lending money. While several scoring models exist, FICO and VantageScore are the most widely recognized and utilized. These scores are derived from information contained within an individual’s credit reports, reflecting their financial behavior over time.

Both FICO and VantageScore models weigh several key factors to determine a score. Payment history, which indicates whether bills are paid on time, consistently holds the most significant influence, typically accounting for 35% to 40% of the score. Credit utilization, or amounts owed, makes up 20% to 30% of the score, reflecting the proportion of available credit used. Keeping utilization low, ideally below 30%, is often advised.

Length of credit history, reflecting how long accounts have been open, contributes 15% to 21%. New credit inquiries and recently opened accounts account for 10% to 11% of the score, as many new applications in a short period can signal increased risk. Finally, credit mix, or the variety of credit types managed (like credit cards and mortgages), contributes about 10% to the score, demonstrating an individual’s ability to handle different forms of debt.

Credit Counseling’s Immediate Credit Report Impact

Engaging with a credit counseling agency typically does not have a direct, immediate impact on an individual’s credit score. The act of seeking advice or participating in initial financial literacy sessions is not reported to credit bureaus and thus does not appear on a credit report.

However, if the counseling progresses to the establishment of a Debt Management Plan (DMP), a notation of DMP participation may be added to the credit report by creditors. While neutral and not directly lowering the score, this notation signals to lenders that the individual is managing debts through a structured program due to financial hardship. This visibility might influence future credit decisions by some creditors.

A common requirement upon entering a DMP is the closure of credit card accounts included in the plan. This prevents further debt accumulation and facilitates repayment. While closing accounts can immediately reduce available credit and potentially shorten the average age of accounts, it is a necessary step to stabilize finances.

Individuals in a DMP are advised to refrain from applying for new credit during the program. This helps maintain focus on debt repayment and avoids inquiries that could temporarily lower a credit score.