Many Canadians struggle with debt. Maybe you’ve tried to budget and save but no matter how hard you try, your credit and debt repayment still isn’t where you want it to be. The good news is there are ways to get out of debt, and you won’t be alone as you work to rebuild your finances.
If you’re looking for some extra support, you may want to consider credit counselling. What is credit counselling? We’ll walk you through what it is, how it works and how it affects your credit. We’re here to help you rebuild your credit and take control of your finances.
What is credit counselling?
In simplest terms, credit counselling is the path you should take if you are struggling with debt but can still pay your bills. This counselling helps you get out of debt, stay out of debt and improve your credit score.
While paying off your debt can be an extensive process, credit counsellors will educate you on your finances and help you budget, make a repayment plan as well as negotiate with creditors. They’ll also educate you on your finances and budgeting so you can make a plan to pay off your debt.
Types of credit counselling
There are two main types of credit counselling: for-profit and nonprofit.
- For-profit. For-profit credit counsellors ensure you have access to the necessary services to get out of debt and remain there. They do charge for their services and you’ll have a number of professionals available to help you. Their main goal is to help you stay debt free as this is how they sustain their business.
- Nonprofit. Most nonprofit credit counsellors don’t charge for their services. These agencies need to keep up with their high standards, ensuring you get out of debt and stay there. It’s important to find a credible nonprofit agency if you choose to go this route.
How does credit counselling work?
When you meet with a credit counsellor, they usually help you do the following:
- They’ll assess your current credit situation and debts.
- Next, they’ll walk you through the following:
- Creating a budget
- Consulting with creditors to waive or lower late fees
- Setting up a debt consolidation loan
- Creating a debt management plan
Nonprofit and for-profit credit counsellors may work a bit differently but their goal is the same – to help you improve your credit.
Nonprofit debt consolidation in Canada
When you’re in debt, your goal should be to get the amount you owe as low as possible. Using nonprofit debt consolidation in Canada is one of the main ways to make your debt repayment reachable and less overwhelming.
Debt consolidation is a process that uses an additional loan to pay off a combination of all your other debts, so you only make one payment to that specific loan. Although taking out another loan while you are already in debt can seem risky, having only one payment is comforting and the interest rate is typically lower.
Of course, you should still use debt consolidation with caution. This plan isn’t for everyone and if you don’t use a firm budget while paying off your loan, you could end up doubling your debt. Debt consolidation may also be hard to qualify for if you’re already behind on your payments.
Let’s look at the pros and cons.
- You’ll only have to make one payment while paying off all your loans.
- You will likely have a lower interest rate.
- You risk doubling your debt.
- You may find it difficult to qualify if you’re struggling with debt and low credit.
- You risk losing control of your finances if you don’t stick to a budget.
While there are always risks, debt consolidation may be a great option for you to pay off your debt. If you’re unsure about the process, talk to a credit counsellor.
What’s a debt management plan?
When you visit your credit counsellor, they may help you set up a debt management plan (DMP). DMPs fuse all your debt into a single monthly payment that fits your budget but it’s different from debt consolidation. Your credit counsellor will take this plan to your lenders to negotiate your payment terms. They may negotiate to decrease or waive your interest rate and extend your debt payment deadlines.
Since the DMP is an agreement between you and your creditors, there is a chance they won’t accept your proposal. If this is the case, your credit counsellor may arrange a different payment plan with those specific creditors.
DMPs don’t cover every type of debt, which means you’ll have to make additional payments to debts that don’t fall into the following categories:
- Credit Cards
- Lines of credit
- Unsecured loans
As with any debt repayment plan, there are benefits and risks.
- You’ll only make one payment a month.
- Your interest rate will be 0 or at least lower than your current interest rate.
- Your debt payment deadline may be extended.
- Your creditors may not accept your DMP.
- DMP won’t cover every kind of debt.
It’s important that you ask your credit counsellor which of your debts will be covered in the plan and which won’t to ensure you are not missing any other payments.
Debt management programs vs. nonprofit debt consolidation
You’re probably wondering about the difference between DMP and debt consolidation. The main difference is you can arrange debt consolidation on your own, but it requires you to take out an additional loan. DMP is a formal proposal that only a credit counsellor can set up. This plan doesn’t require taking out another loan.
Is credit counselling bad for your credit score?
The short answer is no, not in the long run. Although future financial lenders will be able to see your debt history during a credit check later on, it will not affect your credit score. Credit counselling history remains on your report for up to three years.
The long answer is a bit more complicated. Enrolling in credit counselling may require you to close current accounts, which limits your available credit. When your credit counsellor sets up payment plans for you, they are bargaining with your existing creditors to try and get you to pay less in the long run. Since you didn’t pay the full amount you originally agreed on, your account may be marked as settled, negatively affecting your credit score. On the opposite note, your creditor could mark your account as current or full, which would have positive results on your credit score.
How long does credit counselling take?
Since no two consumers’ debt are alike, there is no definite number stating how long you will need to enroll in credit counselling. The time it takes is all based on your credit history.
The easiest and quickest credit counselling cases have consumers out of debt in as little as 12 months. If you struggle to pay off your debt principal with a strong plan, it could take you years, especially if you can’t afford the interest rate or additional funds.
How do you find a credit counsellor?
Most credit counsellors offer their services in person, over the phone or online. When you find one that works for you, figure out if they work for a profit or nonprofit agency. Nonprofit credit counsellors will assist you for free.
Make sure the agency you choose has a good reputation with the provincial and national associations. Look out for agencies that are misleading consumers. If you think credit counselling is for you, you can use these associations to make the process easier:
- Credit Counselling Canada
- Canadian Association of Credit Counselling Services
- Canadian Association of Independent Credit Counselling Agencies
Signs that you might need credit counselling
- You’re short on cash. You find yourself with little to no money and often resort to using credit while only meeting the minimum required payment each month.
- You use credit to pay off credit. You can’t afford to pay off your credit, so you pay it off with another credit line.
- You request increased limits. You request a higher limit on your credit cards because your spending is always more than your budgeted limit.
- You ask friends and family for money. You find yourself leaning on friends and family asking them to borrow money to make it through the month.
If you find yourself struggling, don’t be afraid to ask for help. Credit counselling can help you get back on your feet and feel more in control of your finances. Debt can be overwhelming but if you take it one step at a time, it will feel much more manageable.
How Birchwood Credit can help you rebuild your credit
Birchwood Credit is more than just a dealership. We’ll help you rebuild your credit and work with you to find a vehicle and payment terms that fit your budget.
We help all credit types.
We have flexible payment options.
We’ll help you rebuild your credit using our Secure Credit Check.
We’ll get you into a vehicle even with less than perfect credit.
Above all else, we’ll talk with you. This is a collaborative process – we’ll help you find a vehicle and payment options you can afford and feel good about, even if you have less than perfect credit.
Our offices are open though if you’d prefer to shop from the comfort of your home, you can with our Buy From Home program. Your entire buying experience will be 100% contactless from the loan approval and vehicle shopping to the test drive and delivery. You’ll even get a $1000 rebate and other added benefits. Visit our Buy From Home page for details.