5 Tips to Choosing Credit Counselling for Debt Relief

credit counselling

Credit counselling is a very good alternative to dealing with debt problems. If you have a modest amount of debt, with very few creditors credit counselling, through a debt management plan, provides you with a voluntary program to pay off debt sooner. But how do you know if it’s the right choice? How do you know if the counsellor you contact can really help?

If you are considering credit counselling as an option to deal with your debts, here is a short checklist of what to consider:

  1. Know what credit counselling service you might need. Credit counselling is one of those terms that is used and abused by marketing companies. It can mean anything from general advice on dealing with money to a specific program to reduce your debt.  The most important thing is for you to consider is what you are looking for.  When you are speaking to someone about credit counselling let them know if you are simply looking for help budgeting or if you are struggling with keeping up with your payments and think you need debt relief.  If you’re not sure yourself, make sure the company you speak with talks to you about all your options, and they they don’t just try to sell you one solution.
  2. It’s equally important to know who you are talking to. Anyone can call themselves a credit counsellor – you need to ask them about their qualifications and experience.  Ask if they are providing the service or are they going to refer you to someone else.  It’s common today to find intermediaries who call themselves credit or debt counsellors and end up referring you to a licensed bankruptcy trustee to take care of your debts, after having collected a fee from you first.
  3. Credit counselling plans are not legally binding procedures – they are voluntary for both you and the people you owe. That means you can pick and choose who to include in a credit counselling plan.  So if you want to exclude a debt or two you can. The other side of this of course means you also can’t force anyone to agree to the plan.  Major banks and credit card companies usually respond favourably to credit counselling or debt management plans – many pay day loan companies, high interest finance companies and the government do not. If you need to ensure all of your creditors participate, consider a consumer proposal as a viable alternative.
  4. Credit counselling plans work best with a small number of creditors and a limited amount of debt. The greatest benefit to a credit counselling or debt management plan is the fact that in most cases there are no new interest charges.  Your monthly payment goes directly towards reducing your debt.  Most plans are set up to run for 48 months (although 60 month plans are possible) so if you owe $9,000 your payment will be around $200 per month.  That’s a great deal and a good way to reduce your debt, assuming your debts are small enough that you can afford to pay back your debts in full.
  5. A credit counselling plan will impact your credit report and rating. When you enter into a debt management plan the debts you include in the plan will be rated at an R7.  They will stay there while you are in the plan.  R7 simply means you have entered into a plan to settle you debt.  In this case, settle is a legal term that means instead of the original terms of repayment, you and your creditors have “settled” on new terms (like no new interest on the debt).  The R7 will prevent you from being approved for any new credit while you are in the credit counselling plan. There is little difference between the credit impact of a debt management plan and a consumer proposal. Don’t assume that because it’s credit counselling it will be better for your overall credit score.

I am a chartered professional accountant and a licensed trustee in bankruptcy.  Unlike many in my profession, I think credit counselling plans are an excellent tool to eliminate debt. The trick is to know when this option is the best solution to deal with your particular situation.

If you have debt problems, and would like to explore your options, contact an debt expert today who will walk you through all of your debt relief options. Then you can choose the right solution.

Category: Credit Counselling |

Nov 19, 2014

About Ted Michalos

Ted is a Licensed Insolvency Trustee and Chartered Accountant with more than 20 years experience. He is a co-founder of Hoyes, Michalos & Associates Inc., one of the largest personal insolvency practices in Canada focused on helping individuals deal with their debt.

Join the Conversation

  1. Carter Michaelson

    My wife and I are in some pretty big debt after a car accident left us with too many medical bills. We have been scraping by ever since. A friend of ours suggested we look into credit counselling and I think that it would be a really good idea. I will have to do some more research regarding it and use these tips in the process. Thank you for the information.

  2. Drew Harrison

    I had no idea that counselling will impact your credit score! It is really amazing to me how many seemingly small things can have lasting consequences. I’ll have to be absolutely sure that need a councilor before I hire one. Thanks for the great info!

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