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Updated:         June 3, 2018

Advertisements abound today for consumer credit services. These counseling services typically provide debt management plans and financial counseling, often as a secondary action. Emphasis is primarily on reducing and/or eradicating the debt.

The primary attraction for such programs is that creditors cease charging interest on the debts allowing the borrower to pay off the principal portion only and discharge the debt sooner. A peripheral benefit, for some, is that creditors are prohibited from calling the consumers who sign up for the credit counseling service. For those consumers who have been harassed by creditors, being rid of the threatening phone calls can provide great relief.

While this sounds like a "can't miss" type program for consumers who find themselves over-extended on credit, One needs to recognize the "down side" of entering such a program, especially if one intends to seek a mortgage for purchasing or refinancing a home.

Most institutional lenders view the participation in a consumer credit counseling service much like having entered a bankruptcy, thereby affecting a borrower's ability to acquire a home loan. Thus, while enrolling in a credit counseling program might be helpful for getting a handle on one's debts, consider carefully the long term affects to one's credit rating.

Here are some facts regarding consumer credit counseling and the affect on home loan financing.

1. Enrollment in a credit counseling program is treated as if he borrower declared bankruptcy. The reason is that interest on the consumer's debt is terminated and the borrower simply pays off the principal portion of the debt. Lenders view this as a "settlement for less than owed".

2. Depending upon the loan program, a designated amount of time must elapse from the "discharge" date of the bankruptcy. For VA, FHA and USDA loans, the period of time from discharge is two years, for Fannie Mae/Freddie Mac loans the time period is four years. Lenders require the borrower to have "restored" credit following a bankruptcy or participation in a credit counseling program . . . meaning that the borrower must have current credit. In all situations, the credit report must demonstrate one's ability to handle credit with no blemishes on any accounts after the discharge date. 

3. Often enrollment in a consumer credit counseling program requires the borrower to cancel all credit card usage, although most programs allow the use of a debit card. The result is that the borrower is on a nearly "cash" basis with no credit record. This can hinder the restoration of credit during the consumer credit payoff period. With today's reliance on credit scoring for loan approvals, borrowers who terminate credit during their consumer credit contract could be disadvantaged when they want to resume credit usage.

4. As indicated in #1 above, many lenders determine a borrower's eligibility based upon the time elapsed from the bankruptcy discharge date. When enrolled in a credit counseling program, the "discharge" date is calculated as the date when the debt is paid in full. In other words, if a borrower is in a four year payment program and wants to then seek a Fannie Mae loan, they could conceivably have to wait a total of eight years before they would be eligible to proceed.

One final concern with some consumer counseling agencies is reports that consumer payments are sometimes not made on time by the agency. The result can be that late payments appear on the borrower's credit report while enrolled in the program.

Final analysis . . . Consumer Credit Counseling Programs can be a way to eradicate heavy credit debt, but the consumer may want to explore all other possibilities prior to entering a program. The companies are called credit ‘counseling” services because they do provide counseling. You may find other strategies for dealing with your debt situation than entering the program. If enrolling in the service seems the most appropriate way to deal with your credit difficulties do be aware of the potential consequences when you seek a home loan in the future.

Closing Credit Accounts

Web Page/Credit Counseling Services