A reader worries his debt-relief options will hurt more than they'll help.

Question: I got almost $4,000 on my credit cards, and I can barely make more than the minimum payments. It’s a real mess, but the more I look at my options, the more confused and afraid I get. There’s “credit counseling” and “debt counseling” and “debt consolidation” and “debt management” and “debt settlement.” Will any of this stuff hurt my credit score? Is debt consolidation bad? I don’t want to pay off my credit cards and then face a bunch of new problems.

— Paul in Oklahoma

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fastI hear you, Paul. Debt is a complex problem, but thankfully, the solutions aren’t as complex as many folks make them out to be.

Let’s tackle your confusion first, then ease your fears.

In order, you mentioned these terms…

Credit counseling and debt counseling

Two terms for the same thing. I prefer credit counseling, because it’s more precise: We’re doing more than simply advising you on getting out of debt. We’re helping you rebuild your credit. This is usually a free service, delivered by a trained professional over the phone.

Learn more: What Is Credit Counseling… And Why Do I Need It?

Debt consolidation

If you have balances on several credit cards, and each is charging a different interest rate, you can save by rolling them all into one lower-interest monthly payment. There are many ways to do this, each with its own pros and cons. Thankfully, picking the right one for your circumstances is easier than you think.

Learn more: All You Need To Know About Debt Consolidation

Debt management

This is short for debt management program, or DMP. If you call a credit counseling agency, it might recommend you pursue one. Basically, you’re assigned a credit counselor, who negotiates on your behalf with your creditors for reduced interest rates and the waiving of penalties and late fees. The catch? You must close your credit cards, but you can still use a debit card.

Learn more: Using A Debt Management Program

Debt settlement

This is basically one step shy of bankruptcy. It sure sounds good: You settle your outstanding credit card debt for less than you owe, often pennies on the dollar. Why would your debtors agree to take less? Because they know they might not get anything, and something is better than that. However, the Federal Trade Commission ranks unscrupulous debt management firms as one of the Top 15 most common purveyors of consumer fraud. So thoroughly investigate anyone offering this service.

Learn more: How (and When) Debt Settlement Works

How these activities affect your credit score

I have good news, Paul, and even the bad news is good…

Credit counseling doesn’t affect your credit score at all. The credit bureaus don’t care if you’ve consulted a professional counselor seeking advice on better managing your money — in fact, they’ll privately be pleased to hear it.

Debt consolidation might help your credit score if it means you make your payments on time. That’s because “payment history” is 35 percent of your score, according to FICO. That eclipses the 15 percent for “length of credit history,” which might take a hit because you’re closing some accounts with higher interest rates, which you may have had for a while.

Debt management programs may actually improve your credit score over time. Remember what I said above about the factors that comprise your score? Your payment history is the biggest chunk at 35 percent, but second is “amounts owed” at 30 percent. Well, each payment you make is lowering that amount. In the short run, though, your credit score might be affected. Or it might not. There are too many variables to list here, but know this: If you complete a DMP, eventually your credit score and your overall financial health will benefit.

Debt settlement definitely affects your credit score. Like bankruptcy, you’re not paying back everything you owe, and credit bureaus don’t like that.

So is debt consolidation bad for you?

If you’re focused on your credit score, debt settlement is the only activity on this list you should worry about.

Why? Because even if a DMP makes a dent in your credit score for a little while, the alternative is far worse: You don’t pay off those out-of-control credit card bills, and eventually, you’re forced into debt settlement or bankruptcy. Then you can forget about getting good terms — or perhaps any at all — for a car or home.

If you want the low-down on which program is right for you, call us at 1-800-810-0989. We’ll explain them all in plain English and without high-pressure sales tactics. In fact, Debt.com doesn’t offer these services. We simply refer you to highly rated companies that do. And if you complain about those companies, Debt.com investigates on your behalf.

So don’t have confusion or fear. Find your inspiration.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.


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Meet the Author

Howard Dvorkin, CPA

Howard Dvorkin, CPA

CPA and Chairman

Dvorkin is the author of Credit Hell and Power Up and Chairman of Debt.com.

build credit, credit card debt, credit score, debt consolidation

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Article last modified on December 27, 2018 Published by Debt.com, LLC . Mobile users may also access the AMP Version: Ask The Expert: Is Debt Consolidation Bad For My Credit? - AMP.