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How Credit Counseling Affects Your Credit Score

When a person is ready to approach credit counseling, their objectives are usually two-fold: get out of debt and improve their credit score. Credit counseling is one of the best ways to improve your financial situation, including your credit score. When you are able to get out of debt and improve your credit score, your overall financial position will stabilize.

What is a Credit Score?

There are actually two kinds of credit scores: FICO score and Vantage score. For the purposes of this article, we will be referring to the FICO score as that is what most banks and creditors use to determine your creditworthiness.

And that’s what a credit score is all about: your creditworthiness. Banks and creditors use this score to determine how risky it would be to lend you money or offer you a line of credit. It’s their way of assessing risk and reward.

A FICO Score is a three-digit number based on what information appears in your credit report. It determines your creditworthiness and, in turn, influences the amount you can borrow, repayment terms, and the interest rate. Because lenders need a quick and consistent way to decide whether or not to loan you money, they use your FICO Scores.

A FICO Score is what you might consider a summary of your credit report. It determines how long you’ve had credit (meaning, when is the first time you took out a credit card or got an installment loan), how much credit you have (how much do you have available to you), if you are using your available credit regularly, and if you consistently pay your bill on time.

Not only do FICO Scores help lenders make smart and fast judgments about who they approve for loans, it also helps people get fair and fast access to credit when necessary. Your FICO Scores are influenced by your financial behavior as they are calculated based on your credit information. By paying bills on time, not overextending yourself, and making efforts to pay off debt early, you can improve your credit score.

Remember, a good FICO Score can save money in interest and fees if loaning to you is seen in the lenders’ eyes as a low risk. They will give people with better credit better terms, including interest rates and repayment terms. But, you may be wondering: how does the math work in calculating a credit score?

How is a Credit Score Calculated

Knowing how your credit score can impact your ability to get a loan, get a credit card, rent a place to live, get a mortgage, or even get a new smart phone plan, as well as the interest rate you have to pay. The higher your credit score, the easier it is to get approved.

Like most risk reward ratios, credit scores are calculated by high-tech algorithms. While credit-scoring algorithms are industry secrets, credit-scoring companies do tell us the basics of how to positively impact a score. It starts with a review of your overall credit report, generally found in one of three bureaus: Experian, Equifax, and TransUnion. These are the three main credit bureaus that collect your credit information. These reports can be pages and pages long. That is a lot of data for an individual loan officer to go through.

Credit scores convert the information from your credit report into an simple score. It’s akin to your GPA in school — all your credit activity (schoolwork) is on your credit report, and the credit score is your final GPA. Most scores range from 300 to 850, and a higher score indicates you are more creditworthy.

Your score may vary across the different reporting agencies, but when a lender pulls your report, they generally use the report with the highest credit score when determining your creditworthiness.

The FICO formula breaks credit-scoring elements into five groups:

  • Payment history
  • Current credit use
  • Length of credit history
  • New credit
  • Types of accounts

FICO compares each category’s importance by percentage. The exact percentage may vary, but the following breakdowns are a good guideline:

Payment history (35%) Your payment history is whether or not you are making on-time or late payments. Paying on time and never having late payments will improve your score. But late payments will damage your score. Your credit report also shows how late payments are (e.g. 30-, 60-, 90-days late), and the further behind you are, the greater the damage to your credit score. If your account gets sent to collections, that will negatively influence your overall credit score.

Current credit use (30%) Your current credit use includes how much you owe total, how much is on each account, the total number of accounts with active balances, your principal balance on installment loans, and how often you use revolving accounts (credit cards).

Your general use rate and the interest rate on each account are used as credit-scoring factors — and, in both cases, a lower use rate improves your score. One great credit hack is to make credit card payments before the end of the statement period. This can lower the balance reported to the credit bureaus, which will lower your use rate and improve your credit score.

Length of credit history (15%) Here, the algorithms look at account aging: your oldest and newest accounts, your overall age of accounts, and whether or not your accounts have been used recently all add to the length of credit history category. Generally speaking, a longer, healthier credit history creates a better credit score. Some people believe that closing accounts can help your credit score; others will tell you that it hurts your score. What’s the truth?

When you close an account, pay off a loan, or pay off collections, the account won’t instantly disappear from your credit reports. Instead, the credit bureaus will remove closed accounts that never had late payments 10 years after the account closes. If the account shows a late payment, the account is removed seven years after the initial late payment. Closed accounts affect your length of credit history, and can influence other factors for as long as they stay on your report.

New credit (10%) Applying for new accounts and the time period since you opened a new account can affect your score. Credit inquiries — anytime someone checks your credit report — fall into this category. This doesn’t include anytime you get pre-approved by a creditor. The danger is that if you apply for a line of credit or loan, the credit report is checked, and you don’t get approved, that can mildly hurt your credit score for up to two years.

Types of accounts (10%) Where you have accounts, and your performance as a debtor, will impact your score. The total number of open accounts you have, plus the varying types (credit cards, personal loans, auto loans, mortgages) could improve your credit score.

What won’t affect your credit score? While a lot of personal information and financial data can appear on your credit report, those identifiers and information are unlikely to damage your credit scores:

  • Your marital status
  • Your age, sex, gender, race, nationality, ethnicity or where you live
  • Whether you receive public assistance or enroll in credit counseling
  • Religious or political affiliations
  • Your income, assets, employment status or job title
  • The interest rates on your accounts
  • Anything that isn’t in your credit report

It is essential that you monitor your credit using any of the number of websites or monitoring services available for free online. You may not think that your credit score is that important, but it does matter – a lot.

Why Credit Scores Matter

Credit scores offer lenders a quick, unbiased evaluation of your creditworthiness. Before credit scores came along, the credit granting process was glacially slow, unreliable, and biased. FICO scores are used by 90% of top US lenders and because of credit scores -

People get loans faster Scores are available almost instantaneously, which helps lenders approve loans quickly. Most of today’s credit decisions are made within minutes. Even mortgages can be approved in hours instead of weeks if your score is above a lender’s “score cutoff”.

Credit decisions are fairer Prior to credit scores, factors like race, religion, ethnicity, gender, and marital status were used to unfairly bias lenders against certain individuals. Now, with credit scoring, lenders focus only on the facts related to credit risk.

Credit “mistakes” count for less You won’t be haunted by poor credit performance in the past when credit scores are figured. Past credit issues fade while recent good payment patterns improve your credit report.

More credit is available Using credit scoring helps lenders approve more loans, because credit scores give them the best information possible to decide. Even applicants with scores lower than a lender’s cutoff for “automatic approval” can see benefits from credit scoring. Most lenders have their own separate guidelines and offer packages of special interest rates or repayment plans based on risk. And, since lenders tend to have their own rules about lending, you can try more than one lender if you are turned down.

Credit rates are lower overall Because more credit is available than ever before, the cost of credit (interest rates and origination fees) for borrowers goes down. Automated credit processes, like credit scoring, make the process much more efficient and it costs lenders less to complete the lending process.

So, once you know the ins and outs of your credit report and credit score, how can you improve them with credit counseling?

Credit Counseling and Credit Scores

Working with a credit counselor gives you the opportunity to take specific action to increase your credit score. But, that doesn’t mean that just because you see a credit counselor, your credit score improves automatically. Everyone is different, every situation is different, and every credit score is different.

Credit counseling is a service, often given free of charge if you are low-income by nonprofit organizations. The accredited counselors there provide clients with credit-related, debt-related, and general financial guidance. Credit counselors start with a review of your credit report, they explain how to read it, and then they answer your questions.

Oftentimes, financial issues can be pinpointed with just that review; however, it is best to go through the review with an accredited counselor rather than trying to figure it out yourself. Once that is done, if needed, a counselor can help you go over your budget and recommend the best course of action for repaying debt Those options include a debt settlement, debt management plan, debt consolidation loans, or bankruptcy.

Simply engaging in credit counseling itself does not directly affect your credit score. The credit counselor isn’t required to report their activity to the credit bureaus in the case of offering advice and counsel. What you do with your counselor’s advice is another matter. It may have the benefit of removing outdated accounts that negatively affect your score, or it could take months to straighten out your credit score. The more quickly you work to create positive changes to your credit report, the faster your credit score will go up. You can start with paying off debt, though some parts of the process could influence your credit score. If a credit counselor requires you to chop up your credit cards to prevent you from accruing more debt, it lowers your existing available credit, affecting your credit utilization ratio. Depending on the current financial situation, a higher utilization rate could make your credit score decrease rapidly.

Closing credit accounts will also affect the aging of your credit history going forward. Once those accounts are no longer there, that portion of the aging disappears. This won’t change your score immediately, but it might slow down your credit score growth.

If you and your credit counselor choose a debt management plan, a lender can report an account you’ve worked hard to bring to date as current or paid in full; this can raise your credit score. However, if your credit counselor arranges for you to pay less than what you owe, called debt settlement, your credit score will be affected negatively.


Knowing how to access your credit report, read it, find your FICO score, and work with a credit counselor are all part of a long-term plan to stabilize your financial situation. While there is a great deal you can certainly do on your own, credit counselors are more likely to have the skills and knowledge to help you make the best possible decisions in eliminating debt and raising your credit score at the same time.



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