I have recently worked with many borrowers who have utilized credit counseling to pay off their debt. Credit counseling (also known as debt counseling) helps you pay off your unsecured debt (credit cards, etc.) using a payment plan.

I am not a fan of credit counseling if your goal is to increase your FICO score. However, if you are struggling to pay your credit cards and you want to avoid bankruptcy, it may be a good option. Usually you make one payment for all your debt and the credit counseling agency will divide up payments across all your debt. In most cases, they will require you to close your credit cards that are part of the plan. You will not be able to include your mortgage payment, auto loans, student loans or other types of secured loans as part of the payment plan.

My biggest concern is how your accounts will be reported to the credit bureaus. As an example, let’s say you have ten credit cards and the monthly payment for each card is $75 per month or your total debt is $750 per month. The credit counselor negotiates you will make one payment a month of $400 and they apply a $40 payment with each credit card company. However, this does not prevent the credit card company from reporting you late or settled for less since you are not paying what you originally agreed. In addition, if you are required to close these accounts, then your payment history and the length of that payment history is no longer factor into your score which makes up 50% of your FICO score.

The good news is that you will pay off your debt over time, usually within three to five years. The not-so-good news is your FICO scores may drop by 100-150 points or like filing a bankruptcy.

There may be other options if you would prefer to keep your scores up. One option is to apply for a consolidation loan which allows you to pay off all your credit cards and lower your payment. This option may increase your FICO scores since your credit card balances will be low or paid off and you will have established a new installment loan.

Another option is to transfer credit card balances between credit cards which may spread out or even lower your overall payments.

If you decide to work with a credit counseling service, make sure you get everything in writing including when they will begin making payments in your behalf. I encourage you to pull your credit report for FREE through once a quarter to make sure you are seeing these payments being applied to all your debt and how the credit card company’s are reporting your payments.

Finally, a good credit counselor will review your entire financial situation and determine if credit counseling makes sense for you. If not, keep searching for a counselor that will take the time to do this since the plan make take up to five years to complete.

Jim Kaiser

Branch Manager, NMLS #1721861

Cherry Creek Mortgage, LLC, NMLS 3001