Does going to credit counseling affect your credit score?

Visiting a credit-counseling agency just to set up a budget or create a financial plan doesn't affect your credit report or your score -- which hasn't always been the case.

"When we first introduced the FICO score in 1989 through the credit bureaus, the score did pay attention to mentions of credit counseling on the credit report, and they could slightly lower the consumer's FICO score," says Craig Watts of Fair Isaac, which created the FICO credit score that most lenders use. "In response to changes in consumer behavior, in about 1998 we changed the FICO scoring formula so that it ignored all such references to credit counseling on the credit report." They made the change, he says, after discovering that more consumers were going to credit counseling before they were in trouble with their creditors -- instead of waiting until they had problems.

Most of the counseling agencies don't report when you sign up for a debt-management program, either. But the creditor may report if the debt is being repaid through a reduced payment/interest program -- such as a debt management program -- which could affect your credit score. "If the account is reported as some version of 'not paid as agreed,' the FICO score will interpret it as a derogatory trade line, which will almost certainly cause the score to be lower," says Watts. "How much lower will depend on the recency, severity and frequency of the derogatory information on her credit report."

Even though using a debt-management program may affect your credit score, it can still be a good move in the long run -- especially if it helps you avoid missing payments or getting into worse troubles. "The most important factor for their credit risk is that they don't miss any payments," says Maxine Sweet of credit bureau Experian. "Even if they are making reduced payments, scoring models will generally look at whether they are being made on time and how the balance compares to the limit."

For more information about your credit score, see Demystifying Your Credit Score.

MORE: Kiplinger.com | Your Money | Credit & Money Management | Column

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