What are the effects of credit counselling on your CIBIL score?

When you fall ill, you are advised to see a doctor. Similarly, when your credit score is not in good health, it is recommended to see a credit counsellor. 

Credit counselling is likely to have a range of effects on your CIBIL score, based on your individual financial situation and how you make use of these services. 

By and large, credit counselling can be a valuable resource for borrowers who are keen to improve their financial literacy. It is important to note that there may be short-term impacts on your credit score, the long-term benefits of debt repayment can outweigh any transient shortcomings. 

Also, it’s important to opt for a reputable credit counselling agency and carefully examine the advice they give. Here are some impacts of credit counselling:

Debt management plans: The credit counselling agency may recommend you to enrol in a debt management plan, or DMP. Under this, you are told to make monthly payments to the credit counselling agency, which then distributes the funds to your creditors according to an agreed-upon plan. 

As you are enrolled in a DMP, there might be a neutral or slightly negative effect on your credit score. However, after making consistent payments through the DMP, your credit score may improve gradually.

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Financial education: Credit counselling typically involves sessions where you receive guidance on managing your finances, creating a budget, and developing strategies to repay debt. Implementing the advice provided by credit counsellors can lead to better financial habits, which may eventually improve your credit score. For instance, if you learn how to budget effectively and make timely payments, it can impact your creditworthiness in a positive way.

Credit inquiries: When you seek credit counselling, the agency may review your credit report as part of the evaluation process. This is known as a "soft inquiry" and typically doesn't affect your credit score. 

However, if you subsequently apply for a debt management plan or other financial products recommended by the credit counsellor, those applications may result in "hard inquiries," which can have a minor, temporary impact on your credit score.

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Addressing negative items: Credit counselling can help you address negative items on your credit report, such as late payments or collection accounts. Counsellors may provide guidance on disputing errors or negotiating with creditors to remove negative information. By resolving these issues, you can potentially improve your credit score.

Frequently Asked Questions

Do banks make a decision of giving a loan on the basis of the borrower's credit score?

Yes, lenders generally use credit score as a key factor in determining whether to approve a loan application. A low credit score may result in denial of credit or approval with less favourable terms.

How can you improve the credit score?

You can work on improving your credit score by making timely payments, reducing outstanding debt, and maintaining a healthy credit utilisation ratio (CUR) before applying for a car loan.

Does checking your credit score hurt it?

Checking your CIBIL score, also known as a soft inquiry, does not affect your score.

In order to maintain a good credit score, is it important to pay bills on time?

Payment history is a significant factor in determining your credit score. Even a single missed or late payment can negatively impact your score.

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Published: 03 May 2024, 10:32 AM IST