Does Credit
Counseling
Hurt Your Credit Record?
By Robert K. Heady
Bank Rate Monitor
If
you're enrolled in a credit counseling program, does it help
you or hurt you if that fact shows up on your credit report when
you apply for a mortgage or other loan?
It depends on whom
you talk to.
- It's "a big red flag, a warning," say some mortgage lenders who see credit counseling as a sign that the consumer hasn't been able to manage his or her debt and make payments on time.
- Not so, agues Consumer Credit Counseling Service, Atlanta. "It depends on the wisdom of the person reviewing the person's credit report," says Gay Watson, CCCS spokeswomen. "The fact that they've gone for counseling is an indication they're making good on their bills and will probably become a better lending prospect in the future."
Who's
right?
One thing is sure.
Counseling's impact on a person's credit record is a behind-the-scenes
topic in the entire industry. They wish the subject would completely
vanish so they can simply keep running ads promising to reduce
the average Joe's debt often nothing more than a high-fee
scam. But many banks, mortgage brokers and other lenders insist
that Joe's credit score is impacted negatively when he's
in a counseling program.
"It's looked on
in the same way as if you're in bankruptcy," says David
G. Hester, an independent mortgage and investment adviser (877-948-5346).
"It says you haven't been able to meet your obligations
and had to go for help. If anything, the earlier the consumer
goes for credit counseling, the better."
Even worse, adds Hester,
after spotting such a black mark on the loan applicant's credit
record, an unscrupulous mortgage broker may maneuver him into
a "subprime" loan at 10.5 percent vs. the 7.3 percent
that super-creditworthy folks obtain. On a $100,000 fixed-rate
loan for 30 years, that's a difference of $230 in the monthly
payment or $82,500 over the life of the loan.
Yet, Hester tells stories
of mortgage applicants who have been successfully guided to loans
through the right banks because, although their credit records
reveal they're currently in credit counseling, they had excellent
histories of paying their debts on time. But they weren't able
to get the low prime rate available because of the "in-credit-counseling"
item on their report.
In case you're not
aware, in today's culture the average Joe lives or dies on his
credit score. The major player in the scoring industry is Fair,
Isaac, in San Rafael, CA, which calculates what's called a "FICO"
score based on key factors such as:
1) Your payment history.
2) The amounts you
owe, including the percentage of your credit lines that you've
used.
3) How often you've
recently searched for or opened new credit accounts.
4) For how long you've
had credit established.
Your score could change if, for example, you're paying off certain creditors through a debt counseling program, because those creditors inform the bureaus. The info shows up your credit record when, for example, a mortgage lender buys a copy of latest report from a bureau or a third- party broker.
Remember: A low credit score could cause denial of a personal loan, mortgage, insurance policy or even a job. And the fact that the credit counseling industry's secret is now out of the bag i.e., enrolling in their programs can affect your credit standing doesn't help matters any.
Best advice: Start by getting a copy of your credit report from all three credit bureaus (not just one) by calling Equifax at (800) 685-1111, Experian at (888) 397-3742, and Trans Union at (800) 916-800. Odds are you'll find some errors
Finally, before signing up for any credit counseling offer, ask them to explain in detail exactly how your credit report will be affected. Sadly, few people ever do this.
Editor's Note: Robert K. Heady is the founding publisher of Bank Rate Monitor and is the co-author of the book, "The Complete Idiot's Guide to Managing Your Money." You can e-mail him at jrnl8888@aol.com.
