Many Canadians are struggling with debt. You may have tried to budget and save, but no matter how hard you try, your credit and debit repayment are still not where you want it to be. The good news is that there are ways to get out of debt, and you will not be alone as you work to rebuild your finances.
If you are looking for additional support, you might want to consider credit counseling. What is credit counseling? We will guide you through what it is, how it works and how it affects your credit. We are here to help you rebuild your credit and take control of your finances.
What Is Credit Counseling?
Simply put, credit counseling is the path you should take if you are struggling with debt but can still pay your bills. It helps you get out of debt, avoid debt, and improve your credit score.
While repaying your debt can be an extensive process, you will educate credit counselors about your finances and help you budget, prepare a repayment plan, and negotiate with creditors. They’ll also educate you about your finances and budgeting so that you can create a plan to repay your debt.
Types of Credit Counseling
There are two types of credit counseling: for-profit and nonprofit.
- For-profit credit counselors ensure that you have access to the necessary services to get out of debt and stay there. They charge fees for their services and you have several professionals at your disposal to help you. Their main goal is to help you stay debt-free as they maintain their business.
- Non-Profit. Most non-profit credit counselors do not charge fees for their services. These agencies need to keep up with their high standards and make sure that you get out of debt and stay there. It is important to find a credible non-profit agency if you choose this path.
How Does Credit Counseling Work?
When you meet with a credit counselor, they usually help you to:
- They’ll assess your current credit situation and debts.
- Next, they will guide you through the following areas:
- Preparing a budget
- Consult with creditors to waive or reduce late fees
- Establishment of a debt consolidation loan
- Preparation of a debt management plan
Nonprofit and for-profit credit counselors may work slightly differently, but their goal is the same – to help you improve your credit rating.
Non-Profit Debt Consolidation in Canada
If you have debt, your goal should be to keep the amount you owe as low as possible. Using nonprofit debt consolidation in Canada is one of the most important ways to make your debt repayment achievable and less overwhelming.
Debt consolidation is a process in which an additional loan is used to pay off a combination of all your other debts so that you only make one payment on that particular loan. Although taking out another loan while you are already in debt may seem risky, it is reassuring to have only one payment, and the interest rate is usually lower.
Of course, you should continue to treat debt consolidation with caution. This plan is not for everyone, and if you do not use a fixed budget to repay your loan, you could double your debt. Debt consolidation can also be difficult if you are already behind on your payments.
Let us look at the advantages and disadvantages.
- All you have to do is make one payment while you pay off all your loans.
- They are likely to have a lower interest rate.
- You run the risk of doubling your debt.
- If you are struggling with debt and low credit, you may find it difficult to qualify.
- If you don’t stick to a budget, you run the risk of losing control of your finances.
Although there are always risks, debt consolidation can be a good option for you to repay your debt. If you are unsure about the process, talk to a credit counselor.
What’s A Debt Management Plan?
When you visit your credit counselor, 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 counselor will take this plan to your lenders to negotiate your payment terms. They may negotiate to reduce or waive your interest rate and increase your debt payment deadlines.
Since the Debt Management Plan is an agreement between you and your creditors, there is an opportunity they won’t accept your proposal. If this is the case, your credit counselor may arrange various payment plans with those particular creditors.
DMPs do not cover all types of debt, which means that you will have to make additional payments for debts that do not fall into the following categories:
- Credit cards
- Lines of credit
- Unsecured loans
- You only pay one payment a month.
- Your interest rate will be zero, or at least lower than your current rate.
- Your payment period may be extended.
- Your creditors can reject your DMP.
- DMP will not cover all types of debt.
You must ask your credit counselor which of your debts are covered in the plan and which are not, to ensure that you do not miss any further payments.
Debt Management Programs vs. Nonprofit Debt Consolidation Programs
You may be wondering about the difference between DMP and debt consolidation. The main difference is that you can organize the debt consolidation yourself, but it requires you to take out an additional loan. DMP is a formal proposal that only a credit counselor can make. This plan does not require you to take out another loan.
Is Credit Counseling Bad For Your Credit Score?
The short answer is no. Although future financial lenders will later be able to check your debt history on a credit check, this will not affect your credit score. Credit counseling history remains on your report for up to three years.
The long-term answer is a little more complicated: when you enter credit counseling, you may have to close your checking account, which limits your available credit. If your credit counselor sets payment plans for you, they will negotiate with your existing creditors to try to make you pay less in the long run. As you have not paid the full amount you originally agreed, your account may be marked as balanced, which will negatively affect your credit score. On the contrary, your creditor could mark your account as current or full, which would have a positive impact on your credit score.
How Long Does It Take To Get Credit Counseling?
Since consumer debt is not the same, there is no definitive figure for how long you need to sign up for credit counseling.
The simplest and quickest credit counseling cases result in consumers getting rid of their debt in just 12 months. If you struggle to repay your debt with a solid plan, it can take years, especially if you cannot afford the interest rate or additional funds.