Credit Repair

Sometimes this is phrased as “credit counseling is as bad as bankruptcy” or “credit counseling is as bad as Chapter 13 bankruptcy.” None of these statements is true.

A bankruptcy filing is the single worst thing you can do to your credit score. By contrast, the current FICO formula completely ignores any reference to credit counseling that might be on your credit report. Credit counseling is treated as a neutral factor, neither helping nor harming your score.

Credit counselors, in case you’re not familiar with the term, specialize in negotiating lower interest rates and working out payment plans for debtors that might otherwise file for bankruptcy. Although credit counselors might consolidate the consumer’s bills into one monthly payment, they don’t offer loans as debt consolidators door promise to eliminate or settle debts for less than the principal amount you owe.

The fact that credit counseling itself won’t affect your score does not mean, however, that enrolling in a credit counselor’s debt management plan will leave your credit unscathed.

Some lenders will report you as late just for enrolling in a debt management plan. Their reasoning is that you’re not paying them what you originally owed, so you should have to suffer some pain.

That’s not the only way you could be reported late. Not all credit counselors are created equal, and some have been accused of withholding consumer payments that were intended for creditors. The missing payments showed up as “lates” on the consumers’ credit reports, hurting their scores.

Finally, some lenders-particularly mortgage lenders do indeed view current participation in a credit counseling program as the equivalent of a Chapter 13 bankruptcy. If they see it mentioned on a credit report, they won’t extend credit as long as the notation of credit counseling remains on the borrower’s file. But typically such notations are dropped as soon as the borrow¬er completes the repayment plan. By contrast, a Chapter 13 bankruptcy can be reported for seven years or more. (A Chapter 7 bankruptcy, which involves erasing your debts rather than retiring them with a repayment plan, stays on your report for up to ten years.)

Credit counseling isn’t something you should sign up for just because you want a lower interest rate or one place to send your payments instead of many. But, if you’re behind on your debts or able to pay only the minimums, and you want an alternative to bankruptcy, you shouldn’t stay away because of myths about its long term impact on your credit.