Fair Isaac’s mysterious and all-important FICO credit score is affected by hundreds of different factors, and in fact, much of what goes into the score is hidden deep within Fair Isaac’s proprietary algorithm. We are however, given some general guidelines, and wisdom gained through years of analysis.
In discussing whether a consumer’s credit score is impacted by signing up with credit counseling agencies, Craig Watts of Fair Isaac noted in a recent Kiplinger’s article that prior to 1998, participation in such a program did negatively impact the score. However, the scoring formula was changed to ignore references to credit counseling on the report. Consequently, participation in and of itself is neutral. According to myFICO, whether or not you are using a credit counseling agency is not listed on your credit report.
Rather, it is the actions taken that have an impact, and these can be either positive or negative. It primarily depends on what the creditor chooses to report. If for example, a consumer makes a partial payment on an account, the creditor may report that the account is “not paid as agreed,” which results in a negative strike against the consumer’s credit score. A competent credit counseling agency will pay attention to how the creditor is likely to respond, and encourage a written agreement. Rather than simply making a reduced payment, the proper course of action is to get the creditor to agree to the reduced payment.
Once a new schedule has been agreed to, then “not paid as agreed” is no longer accurate, and a creditor may choose to report the debt as current, so long as the new payments are made timely. Before making that partial payment, it is important to determine how the creditor is going to report it.
Credit Counseling Options That Can Affect a Credit Score
Credit counseling agencies will advise debtors that there is a range of options available, typically offering advice on the consequences of each one. Let us take a look at what some of these options are:
- Don’t pay the bill. Although it is certainly an option, this is one that will have the most negative consequences, which may range from more late fees and higher interest, to a lawsuit.
- Pay part of the bill at your discretion. Simply sending in part of a payment will result in the creditor reporting the account as delinquent. Short-term, the impact on your credit score is negative, although long-term, since the bill will eventually be paid off in full, there will be a positive aspect once the debt can be marked as paid in full.
- Pay part of the bill as part of an agreement. A better option than above. By making an agreement to a reduced payment, the short-term hit to the credit score is eliminated.
- Make your full payment on a timely basis. The best of all worlds, this continues the short-term benefit to the credit score as well as long-term—whenever it is possible.
Debt Relief and Improving Your Credit Score
The best credit counseling agencies will help you to achieve two goals: To get out of debt and onto an easier payment schedule, and to improve your credit score. Agencies that focus exclusively on one or the other are only addressing half of the consumer’s problem.
Getting onto an easier payment schedule may solve some short-term problems, but without the greater focus on the FICO consequences, longer-term problems may result. It is vital for the credit counseling agency to offer counsel in how to pay bills the right way, so as to achieve the greatest positive results on the credit score. This may involve foregoing an easier fix, such as negotiating a reduced settlement for a larger debt, in favor of a full payoff at reduced interest or a longer term, but the results will be worth the extra effort.
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