Canadians are struggling with debt like never before, with the average Canadian owing almost $1.82 for every dollar of disposable income.
A key contributor to debt is a lack of financial literacy. Credit counselling can help you resolve debt by teaching you the right financial skills while also offering solutions if your debts have become unmanageable.
This guide will explain what credit counselling is and how it works.
What is credit counselling?
Debt is often caused by a lack of financial literacy. If you’re loaded up with debt and don’t know what to do, credit counselling can help you resolve debt and teach you the financial skills you need.
Credit counselling services are carried out by certified counsellors who help resolve debt problems by offering guidance on debt, credit and budgeting. They suggest advice and solutions tailored to your situation.
How does credit counselling work in Canada?
Credit counselling can help you resolve your debt problems, whether you owe credit card debt, loans, taxes, student debt or another type of debt.
You can access credit counselling services through both non-profit organizations and for-profit companies. Always choose an accredited and certified non-profit credit counsellor.
Credit counsellors offer various services, such as help with debt, budgeting, credit use and other financial issues.
While there’s no legal requirement, many credit counsellors have personal finance and consumer credit qualifications, such as the Accredited Financial Counsellor Canada certification.
A credit counsellor will review your debts, income and expenses to figure out your financial situation and offer solutions to your current debt situation.
How do credit counsellors provide debt relief?
If you need help with your debts, a credit counsellor will recommend the best way to resolve them. Sometimes your counsellor can show you how to do this yourself simply through better budgeting, money management or something else.
They may also suggest a suitable debt relief program, such as a debt management plan, consolidation loan, consumer proposal or bankruptcy. your counsellor will explain the pros and cons of each available option.
Credit counsellors can help you negotiate with your creditors, set up a debt repayment plan or assist you in applying for a debt consolidation loan.
Typically, a credit counsellor recommends a debt management plan, which is a repayment plan paid over a period of up to three years. Under this plan, you make monthly payments to the credit counselling agency.
You will develop a personal and household budget as part of your credit counselling session, allowing you to reduce spending that may have gotten you into debt in the first place.
To support you on your journey to financial recovery, credit counsellors also offer workshops on budgeting, better spending and how to use credit correctly.
How a debt management plan works
A debt management plan is a debt repayment schedule that you agree with your creditors. When you enroll in a debt management plan, you make a monthly payment to the credit counselling agency, which distributes the funds to your creditors.
As a result, creditors stop calling, and you may be able to reduce or stop interest and charges on your debts. But as it’s a voluntary agreement, creditors do not have to accept the plan.
If you enter into a debt management plan, you must fully repay your debts in the agreed period, usually within three years. During the program, you’ll be supported by your credit counsellor and pay fees to the credit counselling agency for administering the plan.
Some debts are not covered in a debt management plan, such as student loans, tax debts and secured loans such as mortgages and car loans.
How do I qualify for credit counselling services?
There are no specific qualifications required to receive credit counselling services in Canada.
Does credit counselling affect your credit score?
Approaching a credit counsellor for advice will not affect your credit. But if you decide to proceed with a debt relief solution, it will appear on your credit report, which can impact your credit score:
- A debt management plan is recorded on your credit report and disappears two years after completion.
- Debt consolidation may temporarily lower your credit score, but it will rebound shortly after.
- A consumer proposal appears on your credit report for three years after you pay off your debts or six years after filing (whichever is sooner).
- Bankruptcy appears on your credit report for at least six years from your discharge date.
If you fail to complete a debt solution, it can severely damage your credit score. But the good news is if you make debt repayments on time and reduce your debt, you’ll avoid collection action and improve your credit in the long run.
How long does credit counselling take?
You will work with a credit counsellor for as long as it takes to pay off your debts. The time it takes depends on your repayment schedule and whether your creditors have agreed to reduce interest rates.
How much does credit counselling cost?
Although a credit counselling agency might reduce your interest, you will likely be charged a fee for their services.
If you choose a non-profit credit counselling agency, it is free or very low cost. Always determine how much money you’ll save after fees before proceeding.
Beware of credit counselling scams
While many are accredited through reputable associations, not all adhere to high standards of practice. Beware of scams and anyone who promises to reduce your debt or repair your credit score quickly.
Here are some tips when researching credit counselling agencies:
- Choose a non-profit credit counselling agency.
- Verify that it is a registered Canadian charity.
- Look for complaints about the agency through the Better Business Bureau.
Is credit counselling a good idea?
Credit counselling can be a valuable source of information when looking for help with your debt problems.
If you decide to use a credit counsellor, always find a non-profit credit counselling agency. Do your research and ensure the agency is accredited by a reputable provincial or national association, such as Credit Counselling Canada.
Although credit counselling is a great option for many, it’s not for everyone.
If you have a large debt load or you cannot afford to pay back your debts in full, you might be better off choosing a consumer proposal or bankruptcy. Both are formal arrangements filed by a Licensed Insolvency Trustee.
A consumer proposal allows you to pay what you can afford, with the remaining amount forgiven. Payments are interest-free, spread over a period of up to sixty months.
Bankruptcy is a positive step for people struggling with overwhelming debts they cannot afford to repay.
Find out more about non-profit credit counselling
If you need help with debt, non-profit credit counselling can offer individually tailored debt advice, debt relief solutions and help with budgeting.
Always ensure the agency is legitimate and accredited by a reputable association.
You can also get free impartial advice from a Licensed Insolvency Trustee, a professional licensed and regulated by the Office of the Superintendent of Bankruptcy.
Let us connect you with a qualified, Licensed Insolvency Trustee who can help you decide which debt solution is right for you.
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