Credit counselors are calling you? Have you noticed how these firms are popping up in Canada? The bait they use is intriguing: $10,000, even $25,000, smallest debt level to qualify! For a few people, so enticing is this hook, they regret their low loans!
Credit Counselors Are Trying To Help You
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 during the last recession. In 2010, Canada’s household debt ratio at around 150% of disposable income climbed 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 of the one way of lasting debt relief—lifestyle change. Please learn to discern financial juggling from lifestyle management. Only then should you reply to credit counselors’ alluring advertising of easy debt relief. Let’s peek into these two approaches.
Here, you and your advisors focus on your finances, not where it ought to be—on you. They emphasize rearranging the numbers—refinancing, second mortgages, merging debt. Often, you end up with one reduced monthly debt payment and more disposable income. So, everything will be okay, 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 merged debt, but your behavior remains unchanged. To be sure, while reorganizing the numbers, you might see good budgeting habits. But, the essence of the procedure is to fix the numbers—fix the credit score!
Getting out of debt forever 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 plan, and become accountable. After behavior shifts, then you juggle the numbers. 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. And, it must file audited financial statements, yearly. Provinces license credit counselors, but no uniform Canadian standard exists.
Two types of credit counselors exist—for profit, and nonprofit. Some set a base debt level, such as $10,000 or $25,000 minimum debt qualification. Financial institutions (creditors) fund some nonprofit counselors, which can cause a conflict of interest. Don’t assume they will focus on your interest ahead of theirs. Although their fees might be lower than for profit firms, learn and beware of the conflict of interest.
What Do Credit Counselors Do
Licensed credit counselors negotiate with your creditors to lower your debts. 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 which will vary depending on your circumstance. Assume a fee of 15%, monthly merged 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.
Often, these credit counselors will work with you only if they believe you will repay the reduced debt. Next time, we consider how you might respond to their call.
Copyright © 2011, Michel A. Bell