Consumer credit counselling services exist to help Canadians overcome challenges with credit card debt. The process starts with a free evaluation, where a trained credit counsellor helps you assess your situation and understand your options for relief. If you can afford to pay back everything you owe, but you need some help, then you move into the second part of the process. The counsellor helps you enroll in a debt management program, which repays everything you owe more efficiently.
Step 1: Receive a free, no-obligation debt and budget evaluation
Most consumer credit counselling services in Canada are non-profit organizations, meaning they provide many services free of charge. This includes a complimentary debt and budget evaluation.
A trained credit counsellor reviews your debts, credit, and budget to see where you stand. The goal is to help you evaluate which debt solution would be the best choice for your unique financial situation.
These free counselling sessions are typically conducted over the phone and take about thirty minutes. During the consultation, the counsellor will help you understand the range of solutions you could potentially use to get out of debt:
By the end of the call, the counsellor will recommend a solution based on your unique financial situation. Every debt solution has its benefits and drawbacks, so this can give you peace of mind that you’re choosing the best option for your needs.
Step 2: Enrolling in a debt management program
A debt management program is a debt solution designed for people who can afford to repay everything they owe but can’t do it on their own. If you have a low credit score or too much debt, you may not be able to qualify for a debt consolidation loan. At the same time, you may want to avoid the severe credit damage caused by solutions like debt settlement, consumer proposals and bankruptcy.
This “sweet spot” is where a debt management program is usually the best choice. It’s essentially an assisted form of debt consolidation because it rolls all your bills into a single repayment plan. You still owe your original creditors, but you repay your debts through the credit counselling agency.
How debt management programs work
- If it turns out a debt management program is your best option, your credit counsellor will help you work out a budget and find a monthly payment you can afford.
- The plan will generally include all your credit cards.
- You may also be able to include some other types of unsecured debt, such as unsecured personal loans, Lines of Credit (LOCs) and some payday loans.
- Then the credit counselling team will contact your creditors.
- Your creditors will agree to accept payments through the credit counselling agency. They will also reduce or eliminate the interest rates applied to your debts and stop future penalties.
- During this time, you should continue to make the minimum payments on your accounts to avoid unintentional damage to your credit score.
- Once all your creditors agree to the plan, your program officially starts
- Each month, you make one payment to the credit counselling agency and they distribute it to your creditors as agreed.
Any cards you include in the program will be frozen when you enroll, and the accounts will generally be closed when you complete the program. The program must be completed in 60 payments or less. Most plans average 36-60 payments.
Your credit report will note that you are repaying your debts through a debt management plan. This notation remains on your credit report for two years from the date you graduate from the program.
How to decide if you need credit counselling
The first step in the process, where you receive a free credit counselling session can be beneficial regardless of which solution you end up using.
Even if you have good credit and think you can consolidate on your own, it can be helpful to get a second opinion to affirm you’re making the right choice. When a consolidation loan is used in the wrong circumstances, it can result in a consumer having more debt, rather than less. If you are unable to afford the loan payments and maintain a balanced budget that covers all your expenses, then you could run up new balances before the loan is paid off.
A credit counsellor can also be useful to help you decide for certain if you can’t reasonably expect to repay everything you owe. In this case, you may need to contact a debt settlement company or a Licensed Insolvency Trustee to discuss options for only paying back a portion of what you owe.
Since credit counselling agencies are non-profit, you’ll get an unbiased opinion. This will help you make an informed decision.
The key benefits of credit counselling
There are three essential services that a trained credit counsellor provides:
Debt consultation
When you’re mired in debt problems, it can be difficult to take a step back and assess your finances impartially. A credit counsellor can help you get a better perspective on your situation without judgment. Counsellors are trained to create a safe, supportive environment during your consultation, so you can explain how you got here and ask all the questions that you need.
Budgeting assistance
Developing a balanced budget is critical as you work to become debt-free. Even if you decide to settle for less than you owe or declare bankruptcy, you’ll need a budget moving forward. Establishing a budget might also help you find the means to pay back everything you owe, so you can avoid the credit damage and permanent public record of declaring bankruptcy.
A credit counsellor can help you assess your spending to see if you can create a balanced budget. You may have “spending leaks” in your budget, which places where you may be overspending without even realizing it.
The counsellor can help you understand how much you really should be spending on things like food and transportation. They may make recommendations, such as downsizing or finding ways to reduce bills and other necessary expenses.
Working with creditors on your behalf
One of the chief advantages of working with a credit counselling agency is that they will contact your creditors on your behalf. Credit card companies are often more willing to agree to reduce or eliminate interest charges when you work with a consumer credit counselling agency. It shows that you are committed to paying back your debt.
While it is possible to contact your creditors on your own to try and negotiate lower interest rates, the results may vary. One creditor may agree to help you work out a repayment plan, while another may be unwilling to budge.
With a credit counselling agency working on your behalf, creditors are more likely to agree to an adjusted repayment plan. Even if you’ve already tried contacting your creditors to negotiate on your own, you may have more success going through an agency.
They have established relationships with creditors and proven records of helping customers get out of debt. So, credit card companies may be more flexible and willing to offer better repayment terms.