Credit Counselling

What is credit counseling?

Credit counseling organizations can advise you on your money and debts, help you with a budget, and offer money management workshops.

Understanding Credit Counseling

Reputable credit counseling organizations employ trained and certified staff. These counselors can talk with clients to help them develop a personalized plan for their credit issues. An initial counseling session typically lasts one hour, with an offer of follow-up sessions. A reputable agency should offer information about its services free of charge without requiring potential clients to disclose details about their situation.

Credit counseling companies can help you create a debt management plan (DMP), which allows you to make a single payment toward your debt each month. Under a DMP, the consumer deposits money each month into an account within the credit counseling organization. The organization uses the funds to pay unsecured debt, such as credit card bills, student loans, and medical bills.

These debt payments follow a schedule that the counselor and the consumer develop together. Often, creditors will need to agree to the scheduled repayment plan. Creditors may decide to lower interest rates or waive fees. A successful DMP requires regular, timely payments. It may take 48 months or more to complete a DMP.

It’s important to note that credit counseling and agencies that provide these services are not the same as companies that offer debt settlement or debt consolidation services. Debt settlement involves the negotiation of a reduction in the total amount of debt owed. This is something that you can do on your own or hire a debt settlement company, which typically involves a fee. Debt settlement can help you eliminate debts for less than what’s owed and avoid bankruptcy, but it can have negative consequences for your credit score.

If you’re considering debt settlement, be wary of companies that ask for an up-front fee or service charge. The Federal Trade Commission (FTC) imposes certain requirements that must be met before you can be charged a fee for debt settlement services.

Debt consolidation is a process in which you take out a consolidation loan to pay off all of your existing debts. Then you would make payments toward the new loan going forward, according to the interest rate and terms set by the lender. This method doesn’t allow you to pay less than what’s owed toward your debt, but it can make repaying what you owe more streamlined and convenient.

Credit counselling services

Credit counselling agencies have several services to assist you in getting out of debt and staying out of debt in the future.

Tracking expenses and creating a budget

Credit counsellors can help you learn how to track your expenses and create a budget for yourself so you are not overspending and potentially getting into more debt. Sometimes sticking to a budget and realizing how much you actually spend in a given month is all you need to curb your expenses and get your debt under control.

Debt repayment education

Credit counsellors can teach you several strategies for repaying debt more efficiently, such as the snowball or the avalanche method. The snowball method prioritizes paying off your smallest debts first, while the avalanche method makes debts with the highest interest rate your top priority.

Debt management plan

Credit counsellors can facilitate a debt repayment plan on your behalf. They can approach your creditors with an informal payment plan where you make smaller payments over a longer period of time. If agreed to, this option may be better for your budget and your schedule.

Credit counsellors also may be able to get you a lower or zero interest rate. While you will still have to pay all your debt to all your creditors, a credit counsellor will consolidate your monthly payments into one payment and distribute the funds to your creditors.

However, credit counsellors can only consolidate credit card debt, lines of credit and unsecured loans into a debt repayment plan. They can ask collection agencies to stop calling, but they have no power to make them do so, as a licensed insolvency trustee would.

Furthermore, a debt management plan will not reduce your debt in the way an informal debt settlement may. A debt settlement is where you negotiate directly with your creditors to pay only a portion of your debt.

Advice on next financial steps

A credit counsellor can help you decide if the following debt clearing options are right for you
A debt consolidation loan from a bank or credit union, which consolidates many unsecured debts into one loan backed by collateral
A consumer proposal or a bankruptcy, which requires a licensed bankruptcy and insolvency trustee

Non-profit vs. for-profit credit counselling

While non-profit credit counselling doesn’t necessarily mean free, it usually means low- or no-cost due to grants and donations made to non-profit credit counselling agencies by the credit industry, the provincial and federal governments, and the United Way. If you opt for a debt management plan, there is usually a one-time set-up fee of $75 and a monthly administration fee of $50. If the client isn’t in a financial position to pay the fees, they will be waived.

For-profit credit counselling agencies, on the other hand, are private businesses that can charge what they want based on company policy, they are not required to be a member of an accredited credit counselling association (though many are), and their relationships with creditors vary since they are not funded by the credit industry.

Furthermore, for-profit companies may receive commissions for pushing clients into a debt management plan. The cost of these plans may be significantly higher, ongoing, and not based on the client’s budget. Clients may also be required to pay for debt analysis or other financial resources, like budget books or videos, which wouldn’t be the case with a non-profit credit counsellor.

Does credit counselling hurt your credit?

Simply seeking credit counselling and receiving advice on debt management or general financial education will not affect your ability to apply for credit. However, a debt management plan will be noted on your credit report as an R7 for about two to three years and may increase your chances of being rejected by creditors.

The CFPB’s Debt Collection Rule clarifying certain provisions of the Fair Debt Collection Practices Act (FDCPA) became effective on November 30, 2021.

Credit counseling organizations are usually non-profit organizations. Typically, their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your financial situation with you and help you develop a personalized plan to solve your money problems. Here are some examples of what credit counselors might do:

Advise you on managing your money and debts
Help you develop a budget
Help you get a copy of your credit report and scores
May offer free educational materials and workshops
Organize a “debt management plan” to pay down your debts

Tip: If you are having trouble making payments on your debts, a credit counselor may be able to help you with advice or by organizing a “debt management plan” for all your debts. Typically, under a debt management plan you make a single payment to the credit counseling organization each month or pay period and the credit counseling organization makes monthly payments to each of your creditors. Under debt management plans, credit counselors usually do not negotiate any reduction in the amounts you owe–instead, they can lower your overall monthly payment. They do so by negotiating extensions of the periods over which you can repay a loan and by asking creditors to lower the interest rates and waive certain fees.

How do I find a credit counselor?

Most credit counselors offer services through in-person meetings at local offices, the internet, or on the telephone. To get started, you can try the Financial Counseling Association of America, on their website or by phone at (800) 450-1794, or the National Foundation for Credit Counseling, on their website or by phone at (800) 388-2227.

Once you’ve developed a list of potential credit counseling organizations, check them out with your state attorney general and state consumer protection agency . Ask the counselors for free information about their services.

How do I choose which credit counselor is right for me?

A reputable credit counseling organization should be willing to send you free information about itself and the services it provides without requiring you to provide any details about your situation. If a service doesn’t do that, consider this a red flag and go elsewhere for help.

Here are some questions to ask to help you find the best credit counseling service for you:

What services do you offer? Look for an organization that offers a range of services, including budget counseling and classes for managing spending and debt. Avoid organizations that push a debt management plan as your only option before they have spent a significant amount of time analyzing your financial situation.
How is credit counseling offered? Services may be offered in-person, by phone, or online. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.
Do you offer free educational materials? Avoid organizations that charge for information.
What are your fees? Are there set-up or monthly fees? Get a specific price quote in writing. Although most credit counseling organizations are non-profits, credit counselors may charge fees for some of their services that they take out of the payments you make to them.
What if I can't afford to pay your fees or make contributions? If an organization won't help you because you can't afford to pay, look elsewhere.
Will I have a formal written agreement or contract with you? Don't sign anything without reading it first. Make sure all verbal promises are also in writing. As with any contract, don’t sign anything that you don’t understand.
What are the counselor’s qualifications? Is the organization or counselor accredited or certified? What are the qualifications of its credit counselors? Find out about what training or professional certifications the counselor has received.
How are your employees paid? Are the employees paid more if I sign up for certain services, if I pay a fee, or if I make a contribution to your organization? If the answer is yes, consider this a red flag and go elsewhere.