My Money Engine

By Liz Pulliam Weston

No.3 Credit counseling will hurt your score as much as a bankruptcy

The current FICO formula ignores any reference to credit counseling that may be in your file. That's been true for the last three years, after researchers at Fair, Isaac, the company that created the FICO scoring system, noticed that people getting credit counseling didn't default on their debts any more often than anyone else.

Your ability to get a loan could still be hurt by credit counseling, however. Your current lenders may report you as late, because you're not paying what you originally owed or because your credit counselor isn't sending your payments in on time. Late payments do hurt your credit score.

Lenders consider other factors besides credit scores in making their decisions, as well. The factors they look at can vary widely. Most want to know your income, for example. Some want to know how much savings you have or whether you're a homeowner. Some will find credit counseling disturbing, while others see it as a good sign.

The mortgage lenders who don't like credit counseling generally treat its enrollees the same as if they had filed for Chapter 13 bankruptcy. Chapter 13 is the kind of bankruptcy that requires a repayment plan and is looked at somewhat more favorably than Chapter 7, which allows you to erase many of your debts. You might still be able to qualify for a loan from one of these lenders, although your interest rates will almost certainly be higher than if you had perfect credit.

If you plan to get a mortgage soon, and you're not already behind on your debts, it's probably smart to steer clear of credit counseling. If you're already in trouble, however, a good credit counseling agency might be able to help you get back on track.