There is life after debt counselling – here’s how to get there

Many consumers think of debt counselling as a way out in these difficult economic times, but then put the thought aside because how will they ever get that ‘blemish’ off their credit records and qualify for credit again?

However, evidence busts the myth that debt counselling has a long-term negative impact on credit scores.

Over-indebted consumers who successfully complete debt counselling have, on average, significantly higher credit scores than those who consider it but do not proceed, according to a DebtBusters’ analysis of consumers who applied for debt counselling over the past five years.

“The primary driver of a high credit score is the ability and willingness to pay back what you owe. This is true irrespective of whether the person is in debt counselling or not,” Benay Sager, head of DebtBusters, says.

“If you pay back your debt, your credit score will not be negatively affected over the long term. Debt counselling provides an effective means to pay back what you borrowed in a structured and affordable way.”

He says the data shows the impact on the credit score of over-indebted consumers who applied for debt counselling at DebtBusters. When they stuck to the restructured payment programme, they completed their journey in under five years on average.

“A consumer’s credit score will drop during the first few months of the counselling journey. In fact, for many consumers, the credit score is already in decline when they apply as they struggle to make ends meet.”

ALSO READ: How to start building a healthy credit history

Expect an initial decline in your credit score

If you start with debt counselling, the initial decline is to be expected as credit providers receive a limited number of debt repayments during this initial period as per wider industry agreements.

Credit providers know they will not receive payments in the first few months and this is built into the overall programme, Sager says.

“Once negotiations with credit providers are finalised and the consumer continues to pay the new restructured, more affordable repayments, they can already see a steady increase in their credit score. By month 12 of the journey, the consumer’s credit score is on par with what it was when they applied for debt counselling.”

In fact, consumers who complete debt counselling have an average credit score that is 112 points higher than their starting point.

“The data is unequivocal. It busts the myth that debt counselling negatively affects your credit score over the long term. Over-indebted consumers who enquire about, sign up and successfully complete debt counselling will not only have lower monthly debt repayments by having their debt restructured, but will emerge with significantly higher credit scores than their over-indebted peers who should have signed up but did not.”

ALSO READ: Having a good credit score is crucial during tough financial times

Why is your credit score so important?

Sager says your credit score is important because these three digits are what everyone from banks to landlords use to determine how financially dependable you are. For the financial sector, the credit score is information that is as important as an ID number. A long-term goal of debt counselling is to help consumers improve their credit standing.

“We see that on average, clients who successfully complete debt counselling and obtain their clearance certificates, manage to secure vehicle finance within two months and secure a new home loan within five months. This shows that for dedicated consumers, it can help turn around their long-term financial standing.”

He says the bottom line is that debt counselling is an effective way for over-indebted consumers to restructure their debt and the research shows that those who complete the process will also benefit from an improved credit score.