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 non profit. And as I said before, some set a base debt level, such as $10,000 or $25,000 minimum debt qualification.
Some non profits 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 provincially, 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.
Next time, we look at how you might respond to their call.
For Christian financial advice about God and money, debt free living tips, debt solutions, and more on Michel A Bell, visit: The New Managing God's Money-The Basics
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