While some Canadians may experience financial hardship due to poor money management, others may experience it due to layoffs, furloughs, or reduced working hours. This situation could lead to the inability to keep up with bill payments and debts. When this happens, Canadians can reach out to a credit counsellor to help them get their financial life back on track.
But, are there any drawbacks to working with a credit counsellor? More specifically, does credit counselling affect your credit score?
Key Points
| What is credit counselling? | Credit counsellors can educate you on effective budgeting or represent you in a more severe debt management program to help you get rid of your debt. |
| Does Credit counselling affect your credit? | While speaking with a credit counsellor does not have a negative effect on your credit score, your credit score could be affected if you choose to enroll in a program designed to eliminate your debt, such as a debt management program or consumer proposal. |
Who Are Credit Counsellors?
Credit counsellors are professionals who help individuals find solutions for their financial challenges. Their services are offered through both for-profit companies and not-for-profit organizations.
Although there are no mandatory requirements to become a credit counsellor in Canada, many professionals are qualified through the Accredited Financial Counsellor Canada Program after completing 1,000 hours of financial counselling.
How Do Credit Counsellors Help?
Credit counsellors will assess your current financial situation and evaluate the different debt relief options available. Through a thorough review of your income, expenses, and debt, credit counselling aims to guide you out of debt and support you in maintaining a debt-free future. Consumer credit counsellors may educate you on sound financial practices to help you improve your budget and get out of debt.
How Does Credit Counselling Work?
The credit counselling process typically starts with a free evaluation. The counsellor will review your finances with you and lay out your debt relief options. This means that they will examine your income, debts, and monthly budget to determine which debt solution is the most appropriate for your financial situation.
Depending on your situation, a credit counsellor may simply help you create a realistic budget or provide basic financial education. If a more comprehensive plan is required, a credit counsellor can help you with a variety of debt solutions, including the following:
- Debt management programs
- Consumer proposals
- Bankruptcies
Debt Management Programs
Debt management programs typically cover all credit card debt and other unsecured debts. The credit counsellor will contact your creditors to propose a repayment plan with reduced interest rates.
The program begins when all your creditors agree to the terms, though creditors have the right to refuse your proposal. If all creditors are on board, you will be responsible for making monthly payments to the credit counselling agency, which will then distribute the funds to your creditors according to the terms of the proposal.
Debt management programs must be completed within five years or through 60 monthly payments or less.
Consumer Proposals
If you can’t pay your debt, your credit counsellor may recommend that you file a consumer proposal to repay a portion of what you owe. A consumer proposal is filed with a Licensed Insolvency Trustee (LIT) and full debt forgiveness is provided once the reduced amount is paid off.
While the details of each proposal are dependent on the debtor’s assets and financial situation, settlements can be as low as 30% of the original debt amount. Proposal payments must be completed within five years, or 60 monthly payments or less, and they do not carry any interest.
Bankruptcy
For those experiencing extreme financial hardship, bankruptcy serves as a last resort. Filing for bankruptcy can relieve you of most of your debts, with some exceptions. However, bankruptcy has the biggest impact on your credit.
Like a consumer proposal, bankruptcy is filed through a LIT and involves making payments for 9 or 21 months, depending on whether you need to make surplus payments.
Does Credit Counselling Affect My Credit Score?
Consulting a credit counsellor for advice on your financial situation will not affect your credit. Only when you enroll in a debt relief program that your credit score may be impacted. That’s because these programs show up on your credit report, though the effects of each program are different.
| Effect On Credit | |
| Debt Management Program | When you enter the program, a note is added to your credit profile and may remain for two years after the completion of the program. |
| Consumer Proposal | A consumer proposal may stay on your credit report for three years after you have paid off all debts according to the proposal, or six years from the date the consumer proposal is filed, whichever comes first. |
| First Bankruptcy | A first bankruptcy may stay on your credit report for six to seven years after the date of discharge. |
| Second Bankruptcy | A second-time bankruptcy may stay on your credit report for 14 years. |
Are There Fees Involved With Credit Counselling?
While the initial evaluation with a credit counsellor may be free, fees are usually involved once you move forward with a debt relief program. These may include any of the following:
- Initial set-up fees
- Monthly maintenance fees
- Application fees
- Membership fees
While the type of fee may vary, they are all regulated by the Bankruptcy and Insolvency Act (BIA).
Can I Get A Loan While In Credit Counselling?
It can be difficult to get a loan while you’re working with a credit counsellor. Most lenders require that you’ve completed your consumer proposal or bankruptcy to be eligible. Moreover, you may want to think twice about taking out a loan while trying to get your debt under control. Adding more debt to the pile can worsen your situation.
Other Debt Solutions That May Have A Lesser Impact On Your Credit
A debt consolidation loan is a good alternative to the other debt-relief options as it may not have as severe of an impact on your credit scores. If you’re having trouble paying down your debt because of sky-high interest rates, a debt consolidation loan may be worth considering. Debt consolidation involves rolling all your debts into a single monthly payment.
You can do this by taking out a debt consolidation loan, which you can use to pay off all your other high-interest debt. If you’re a homeowner, you may also consider a home equity loan to consolidate your debt.
Not only can this save you money in interest, but it can make it much easier to manage your finances, as you’ll only be left with one payment. Plus, debt consolidation shouldn’t hurt your credit score in the long run, as long as you keep up with your loan payments.
Your score may dip initially after applying for a debt consolidation loan. But with proper bill management, your score can bounce back. And over time, paying down your debt on time can have a positive impact on your credit scores.
Bottom Line
If you’re having trouble managing your finances and debts on your own, it might not hurt to seek out the assistance of a credit counsellor. Speaking with them won’t affect your credit. It’s only when you take certain steps to fix your financial issues that your credit may be affected.
