Have you noticed the proliferation of credit counseling firms in Canada? The bait some use is intriguing: $10,000, even $25,000, minimum debt level to qualify! For a few people in debt, so enticing is this hook, they regret their low debt, to boot!
What is causing this flurry of activities? Canada's household debt continues to skyrocket. Earlier, Canadians boasted that our relative debt was much lower than Americans'. Although no longer true, today, many folks hold this view.
Canadians are drowning in debt. Fueled by historic, low-interest rates, Canada's household debt rose steadily during the last recession. In 2010, Canada's household debt ratio at around 150% of disposable income rose above the USA's. Bankers, realtors, and other vested interest groups, continue to say Canadian households are not at risk. I disagree. They argue that our debt increase was gradual and borrowing terms tougher than those in the USA before the 2008 recession. So, our base is more secure.
Still, if you are in debt, should you use a credit counselor? It depends on you, and your circumstance.
Let me assure you that there is one, and only one way of lasting debt relief: Change your lifestyle. Folks do not understand differences between financial juggling and lifestyle management and so, jump at credit counselors' alluring advertising of easy debt relief. Let's look at these two approaches.
Here, you and your advisors focus on your finances, not where it ought to be–on you. You emphasize reorganizing your finances, the numbers–refinancing, second mortgages, consolidating debt. Often, you will end up with one debt that is less than your total debt before juggling the numbers, and a reduced monthly payment. Then, you have more disposable income, and you might think life will be better, and all will be well; right? Wrong. This approach is a platform for greater debt.
Only the figures changed. Instead of having four credit cards with balances, one large line of credit balance, and more, you end up with one consolidated debt, but your behavior remains unchanged.
To be sure, while reorganizing the numbers, you might be exposed to good budgeting habits. However, the essence of the procedure is to fix the numbers–fix the credit score!
Getting out of debt permanently starts with understanding how you got there, not why, and learning from your mistakes. You must change those bad behaviors; start budgeting, get a pre-spending decision procedure, and become accountable. Juggling the numbers follows behavior changes. Credit counseling that does not stress behavior change will never work.
Who are these folks? In Ontario, if an entity negotiates with creditors for you, and collects funds from you to pay your creditors, it must register with the Ministry of Consumer Services. As well, it must file audited financial statements, yearly.
Some credit counselors are for profit, others nonprofit. And as I said before, some set a base debt level, such as $10,000 or $25,000 minimum debt qualification.
Some nonprofits are funded by financial institutions, (creditors) and might be in a conflict of interest! Don't assume they will be looking out for you. Although their fees might be lower than for-profit firms, beware of the conflict of interest.
Credit counselors are licensed in each Province, but there is no uniform Canadian standard.
What Do They Do
Licensed counselors negotiate with your creditors to lower your debts, and normally, you end up with a reduced debt, lower interest, maybe none, and repayment period of less than five years. They will charge a commission on the new payment amount which will vary depending on your circumstance. Assume a fee of 15%, monthly consolidated debt payment $1500, lowered from $3000, they might charge around $225 monthly–over five years, that's $13,500 in fees.
You would pay $1500 monthly to their trust account, from which they pay your creditors.
Typically, these counselors will work with you only if they believe you will be able to repay the reduced debt.
Can They Help
They can help, but you must understand the nature and cost of their assistance. I repeat, lasting debt relief calls for lifestyle changes. Counselors can provide financial juggling by contacting creditors, and lowering your debts, but you must do the hard work of lifestyle change.
Should You Use Them
Before you decide to use a firm, you should do due diligence, which should include the following:
- Interview at least two–for profit, and nonprofit. Remember, they are sales people, so look beyond their facades.
- Check that they are licensed. Contact the relevant provincial government department to see if there are complaints against them.
- Ensure you understand what they do, and their fees. Don't look at the fee alone, look at the package.
- Ignore testimonials on websites; ask to speak with someone who has been through their program.
- For the nonprofit firm, check if it has links to creditors, and so, is in a conflict of interest. If it is working for a financial institution, ensure you understand the relationship.
- Discuss this with your spouse and someone knowledgeable with this procedure.
- Sign an agreement only after you understand your responsibility and the firm's role.
- If you are a Christian, ask the Lord to guide you.
Which Counselors To Avoid
- They tell you that the process will be easy.
- Their program sounds too good to be true.
- They do not stress that you must work with a budget, and you need to make lifestyle changes.
- They don't try to understand you and your journey.
- They are in a hurry, and rush you to sign an agreement.
- They won't give you information you request before they ask you to sign up.
- Before signing, they won't allow you to talk with a previous client, with that client's consent.
Can You Go It Alone
You can do it alone with help and encouragement. First, you must accept your situation and do needed lifestyle changes.
- If you are a Christian, as you repent, confess prior abuse of His funds, ask the Lord to should you how to move ahead.
- Do a spending fast for one month to identify your spending habits, and spending drivers.
- Do a simple financial plan, a budget, and a debt repayment schedule, showing how much you will be able to repay.
- After prayer, and feeling confident you will be able to honor your commitments, contact each creditor and ask for relief. With a credible plan, likely, you will get help. However, you must follow the plan.
- Ask a trusted person to hold you accountable.
Credit counselors provide a service that could help. However, you do the work–you must make tough choices. They provide a structure to help you follow a payment plan. Here is the real issue: to become debt free, do you need a credit counselor to guide consistent lifestyle adjustments that affect your finances?
Copyright (C) 2011, Michel A. Bell