American household debt is rising. Between 2019 and 2020 alone it jumped a full six percent, the biggest single-year increase in more than 10 years.
With so much debt piling up, it’s no surprise that more Americans are exploring consumer credit counseling. But is credit counseling bad for your credit? Can trying to improve things lead to accidentally making them worse?
Here are the facts.
Credit Counseling Itself Does Not Impact Your Credit Score
Credit scores are complicated. Numerous factors go into determining your score and it’s not unusual for consumers to be surprised by what does or does not impact their scores. In light of this, it makes sense that many Americans wonder “is using consumer credit counseling bad?”
The good news is that seeking consumer credit counseling has no direct effect on your credit score. You will not be penalized for seeking counseling or creating a debt management plan.
Long-term, free credit counseling can be the key to:
- Building or rebuilding your credit
- Ditching bad debt
- Achieving an excellent credit score
Working with a counselor can also equip you with the financial skills and best practices you need to make smart choices moving forward and keep your score high during future stages of your life.
When Credit Counseling Can Cause Your Score to Dip
As empowering as credit counseling can be in the long run, in the short term working with a credit management or debt reduction service can cause your score to dip slightly. This is because reducing and restructuring your debt can involve negotiating reduced debt pay-off arrangements and closing some credit cards.
Closing credit cards can:
- Remove accounts you have held the longest from your credit score calculation
- Revise your credit mix
- Alter your credit utilization ratio
Each of these factors plays a role in your overall score.
As alarming as it may be to see your score drop, for most Americans these changes will have only a small and temporary impact. Moreover, it is important to note that these changes are largely unavoidable. They would necessarily happen at some point as you paid down your debt anyway.
Getting them over with upfront while paying down your debt puts control of your score and your future in your hands. The gains you can expect to see as you pay down and pay off old or overwhelming debts will quickly more than compensate for any hits your score takes as a result of the process.
Consumers with specific concerns about seeing their scores dip can discuss those issues with their credit counselors. Together they can work out a plan that provides the debt relief that consumers need without hampering their ability to access the credit due to temporary changes to their credit score.
Is Credit Counseling Bad?
Is credit counseling bad? Absolutely not. While certain steps in the debt reduction process can slightly and temporarily lower your score, working with a consumer credit counselor can be the key to building your way up to a great credit score.
Learn more about managing your finances by checking out the other great articles in our finance section today.