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Should You Consider Credit Counselling?

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Publish date July 28, 2019 Views: 547 Comments: 0

According to a recent poll by Manulife Bank, more than a third (36%) of Canadians living with debt say they experience joy when they pay that debt off. But for many, including the 19% surveyed who say they can’t break the debt habit, paying off the money they owe is not so easy. When debt starts to negatively affect your life and you have difficulty making your monthly payments, it may be time to seek outside help, like credit counselling services.

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What Is Credit Counselling?

Agencies that provide credit debt counselling can help you in a few ways. First, they offer group classes and can give you information on many financial subjects, such as how to create and use a budget or strategies for getting out of debt. A credit counsellor could also meet with you privately to look at your specific situation and make recommendations. Finally, they can help you create a debt management plan, which is an informal voluntary agreement with your creditors to pay back what you owe by making one consolidated monthly payment through the credit counselling agency.

How a Debt Management Plan Works

If you go for a debt management plan, you must be sure to tell the credit counsellor about all the debts you have. Then he or she will get in touch with each of your creditors—such as your credit card company,  bank or other financial institution—to see if they will lower the amount of interest they are charging on your debt, or if they might waive the interest fees entirely. They will also ask if you can have more time to pay back what you owe.

Note that your creditors are under no obligation to agree, but they often will because they see this as a good opportunity to at least get back the principal amount that they’ve loaned you. If your creditors do agree to the plan, it will be easier for you to make your now-lower consolidated monthly payment to the credit counselling agency, which will use that money to pay back your creditors as laid out in the plan. Your part of the deal is to make your payments on time, and to refrain from borrowing any additional funds until you’ve paid off what you already owe.

Who Is Credit Counselling Best Suited For?

Not all types of debt can be included in a debt management plan, so credit counselling is usually best for people who have a few simple unsecured debts, such as a small unpaid credit card balance, personal loan, or other unpaid bills. Tax debt, student loans, car loans and mortgages cannot be settled through a debt management plan.

Does Working with a Credit Counsellor Affect Your Credit Score?

Your credit score won’t take a hit if you simply consult with a credit counsellor for advice. Entering into a debt management plan, however, will lower your credit score in the short term. Your credit report will indicate that you are making payments via the credit counsellor for the duration of your payment plan, as well as for two years after you’ve repaid all your debts. So, that means it may be challenging for you to borrow money during that period. But, if you were already having trouble making your payments, your credit score probably wasn’t great to begin with, and settling your debts is the only way to improve your credit in the long term.

How Much Does Credit Counselling Cost?

Fees for credit counselling are determined by the credit counselling agency. Some are not-for-profits, such as local credit counselling societies, and charge you based on what you can afford, while others are commercial businesses. Be sure to ask exactly how much you’ll have to pay for any services, including:

  • Initiation fees
  • Monthly maintenance or membership fees
  • Application costs
  • Individual fees to each creditor

If the fees seem too steep for you, shop around. There’s no point in paying more in fees to a credit counselling agency than you would have paid simply paying off the debts on your own. And be warned that some consumer credit counseling firms may get a percentage of any debt they recover, and therefore might have a financial interest in you opting for a debt management plan.

Alternatives to Credit Counselling?

There are several other options available to those seeking debt counselling help:

  • Debt consolidation. Also called debt refinancing, this is a way of combining all your debt through your bank or other financial institution, so you can get a lower rate of interest and make a single monthly payment.
  • Home equity line of credit (HELOC). If you are a homeowner and have built up enough equity, you might be able to get a secured line of credit against your home at a lower interest rate than your other debts. This would allow you to pay off your higher-interest credit card debts or unsecured loans.
  • Credit card balance transfer. If your main source of trouble is credit card debt, you could look for a 0% balance transfer credit card, which would allow you to pay no interest at all on your outstanding balance for a promotional period (usually six to 12 months). But if you don’t think you can pay down that balance during that 0% period, this strategy won’t help you once the promotion ends.
  • Consumer proposal. This is a legal consumer credit proposal filed by a Licensed Insolvency Trustee under Canada’s Bankruptcy and Insolvency Act. It is a formal offer to your creditors to settle your debts by paying a portion of what you owe.
  • Bankruptcy. This is a legal proceeding filed by a Licensed Insolvency Trustee under Canada’s Bankruptcy and Insolvency Act. It is essentially an agreement to give up most of your assets, which will be used to pay off your debts.

Comparing Debt Repayment Solutions

 Debt Management PlanConsumer ProposalBankruptcy
What is it?An informal agreement to repay creditors the full amount of what you owe through a consolidated monthly paymentA legal proposal made to your creditors to settle your debts for less than what you oweA legal procedure to give up your assets in exchange for wiping out your debts
Who files it?An accredited credit counselling agencyA federally Licensed Insolvency TrusteeA federally Licensed Insolvency Trustee
Type of debt coveredCredit card debt, unsecured loans or lines of creditCredit card debt, unsecured loans or lines of credit, tax debt, some student loansCredit card debt, unsecured and secured loans or lines of credit, tax debt, some student loans
FeesCredit counselling agency sets the fees; often based on your ability to payBased on the negotiated settlement with creditorsBased on your income
Assets affectedNoneNoneYou must give up most of your assets. Some exceptions (depending on province) include household items and car (below a given value)
Length of paymentsUp to five years (60 months)Up to five years (60 months)9 to 21 months
Impact on credit scoreAn R7 rating stays on your credit report for two to three years after completionAn R7 rating stays on your credit report for three years after completionAn R9 rating (the worst rating there is) stays on your report for for 6-7 years after a first bankruptcy; 7-14 years after a second one

How to Find a Canadian Debt Counselling Service

As previously mentioned, credit counselling service providers come in many shapes and sizes, including for-profit and not-for-profit organizations. It’s important to work with a reputable agency, which may be referred to you through the following associations:

Also be sure to check with the Better Business Bureau to see if any consumers have lodged complaints against the service provider you are considering. And remember, there are no easy fixes to credit troubles. If a company is promising more than what seems reasonable, it’s probably best to steer clear.

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