How Does Credit Counseling Affect Your Credit Score?

What a Free Counseling Session Involves#

Cambridge Credit Counseling offers credit counseling as a free service for consumers who are having difficulty paying credit card and other unsecured bills. This session is a review of your situation and options, not a financial product on its own.

A Debt Management Plan Is a Separate Step#

A debt management plan is not credit counseling itself. Setting up a debt management plan is one possible outcome of a credit counseling session, but it is a distinct arrangement that you would choose to set up afterward.

What Actually Makes Up a Credit Score#

In the FICO credit scoring system, there are five major categories that make up a credit score. Payment history is the largest single factor, making up 35 percent of the score. This means how consistently bills are paid, on any account, plays the biggest role in your score over time.

Having Good Credit Can Save You Thousands#

Having good credit will almost always result in lower payments. Creditors divide credit applicants into several different levels (A, B, C and even D credit). The applicants with the best credit (“A”) receive better (lower) interest rates, and as a consumer’s rating decreases, their interest rates increase. It is not uncommon to see interest rates as high as 29%.

Here is an example. Consumer 1 has “A” credit, 12% interest and a $2,500 balance. Consumer 2 has “D” credit, 29% interest and a $2,500 balance. Each pays the minimum payment due (3% of balance). Consumer 1 would pay back approximately $3,500 over the course of eight and one-half years. Consumer 2 would pay back close to $9,225 over the course of 21 years. While Consumer 1 would only pay $1,000 in interest, Consumer 2 would pay back over $6,725 in interest charges on top of the principal.

Since damaged credit will cost you more in the long run, it is a good idea to keep your credit rating as high as it can be. Pay the balances in full every month, or if you are unable to, pay substantially more than the minimum monthly payment on your credit card. At the very least, be sure to pay the minimum due and always pay your bills on time. Late payments could cause late fees and raised interest rates, and can hinder your chances of receiving future financing. When you apply for credit, apply for credit cards with the lowest possible annual fees and interest rates, and be wary of low introductory rates: they usually rise considerably after the first three to six months.

A Possible Benefit of Working With Creditors#

One of the most significant benefits creditors typically extend to clients of a consumer credit counseling agency such as Cambridge Credit Counseling is a reduction in credit card interest rates. A lower interest rate can make it easier to keep up with payments, which relates to that payment history factor in your score. Our typical client makes one simple, lower payment every month instead of paying all the accounts on their debt management plan separately over the course of the month.

How to Boost Your Credit Score#

If you’ve gone through a financial hardship and your credit rating has suffered, one of the easiest ways to get started reestablishing a good credit history is by obtaining a secured credit card. A secured card works just like a regular credit card, but with one difference: it requires a cash deposit. Your credit limit is usually determined by the amount of your deposit. By getting a secured card, you will have the ability to reestablish a positive payment history.

Before you use the secured card, take a moment to recall what caused your credit to suffer in the first place. Whatever the reasons were, remember that if it happened once, it can happen again. Before you even think about applying for more credit, take a long look at your budget. Write down all of your income and expenses, then ask the following questions:

• Does my income cover all of my expenses? If not, you need to either reduce your expenses or increase your income. Now is not the time to take on more debt.
• Do I have any savings? It is recommended that you have savings equal to four to six months’ worth of expenses. To make sure you are comfortable taking on another monthly payment, pay yourself each month just as you would pay a creditor, for four to six months.
• Can I afford to make another payment on time, every month? If there is any doubt, do not take on more credit. If you miss payments, you will continue to damage your credit rating, not reestablish it.
• How much of a balance can I pay off all at once? It is recommended that your credit limit never exceed your ability to pay off the balance in full.

Once you begin charging, remember that you have to use the card wisely:

• Do not charge more than you can pay off in a month. If you cannot afford to buy an item with cash, do not charge it.
• Pay more than the minimum payment on your credit card balance, and pay off the balance in full every six months or so.
• Do not make any late payments.
• Review each of your credit reports once a year for inaccuracies. Creditors evaluate your financial health by reviewing your credit report, so be sure it is correct.
• Do not open too many accounts. Having too much available credit can hurt your credit rating, as well as tempt you into old spending habits.

Reestablishing your credit rating can take some time. Maintaining a good credit rating is more than making timely payments; it requires sound money management and intelligent choices.

What to Do Next#

If you want to understand your options without any pressure, Cambridge Credit Counseling offers credit counseling as a free service. You can speak with a counselor by calling (800) 235-1407 to ask questions and learn what might work for your situation.