Credit and Debt Blog

I hear some people say that credit counseling is just like bankruptcy. Others say that you cannot get a loan if you are on a debt management plan. There is so much incorrect information being discussed, and regrettably, it is often by professional mortgage loan officers and bankers.

Let’s bury the hatchet on those old urban legends. Here is the truth, from Fair Isaac Corporation, the Federal Housing Administration (FHA) and the US Department of Housing and Urban Development.

Fair Isaac Corporation

According to Fair Isaac Corporation, participation in a debt management plan has no impact on your credit score. Fair Isaac stopped penalizing consumers enrolled in a debt management plan following a study that concluded in the late 1990s.

Fair Isaac does note that mortgage or car loans may be more difficult to obtain while enrolled. However, reputable credit counseling agencies routinely advise clients that they should avoid applying for additional debt while still enrolled in a debt management plan.

Federal Housing Administration

From FAQ #2:

“The FHA recommends a Consumer Credit Counseling program for anyone who fears being denied a loan as a credit risk. You should, as a rule, be in a satisfactory payment situation for at least one year before applying for any FHA loan program. Your credit counselor can address issues such as income-to-debt ratio, how to maintain satisfactory payments for the required time and challenging unfair or erroneous entries on your credit report. It is very important to approach any FHA loan with an improved credit rating if you have had trouble in the past.”

This shows how important other factors beside your credit score are in the loan approval process. Having said that, the purpose of credit counseling is to improve these other factors while helping you gradually improve your credit score over time.

US Department of Housing and Urban Development

From Mortgage Credit Update 99-2:

“The position of HUD/FHA on Consumer Credit Counseling is neutral. It is to be viewed as a part of the total credit history for the last year. If the borrowers are participating in a Consumer Credit Counseling program, have they been adhering to the agreement?”

HUD also places higher importance on the payment history over the last year. Again, this is one of the central components of a debt management plan. The goal is to help you reestablish a positive payment history as a part of the plan.

When someone advises you about the impact of debt management, consider the source. No person should be pursuing a new mortgage if they need credit counseling. They could not possibly get a beneficial rate or necessarily approval if their debt-to-income ratio and credit history are poor. Those very mortgage brokers giving bad advice are the same ones responsible for the subprime mortgage disaster of 2007-2008.