Your most challenging task when trying to solve your debt problem is understanding different types of debt assistance strategies available. This can be confusing because the debt help industry is complex, thus making it difficult to figure out which strategy is best for you.
The goal of this article is to provide you with basic information about Credit Counselling in Vancouver so you can understand exactly what this type of debt assistance can do for you.
One crucial thing to understand about Credit Counselling in BC is that it represents one type of debt help among a range of options available. Credit Counselling (sometimes referred to as debt counselling,) helps you pay creditors back in full. Therefore, it is my opinion that it is not the same as debt reduction since the actual principal amount of debt owing is not reduced.
This is an important distinction because there are other strategies available that provide debt reduction.
How does Credit Counselling Work?
The goal of most Credit Counselling services is to create a “Debt Management Plan” that consists of the following:
- Lowering the minimum monthly payments you make to each of your creditors
- Role all these “new minimum payments” into one consolidated payment
- Lowering your interest rates
- Bringing your overdue accounts up-to-date
Lowering Your Minimum Monthly Payments
The biggest problem for all of my clients is monthly cash flow. Too much money is going out and not enough is coming in. I often refer to this as the Cash Flow Triangle because it is a good visual.
There are only two ways to change cash flow: (1) Bring more money in or (2) reduce the amount of money going out.
Most people are not in the position to bring more money in. Therefore, examining monthly expenses, with the goal of reducing them, is the best option. Reducing minimum monthly payments will change your monthly cash flow. Generally speaking, Credit Counsellors can reduce your payments by between 10 – 20%. However, will it make enough of a change to actually make a difference?
This is where you need to be the judge!
Consolidating the new minimum payments into one lower one
Right now, you are paying each creditor separately. Consolidated payments work differently and have two distinct features:
- All of your payments are rolled into just one payment. Instead of making several different payments, you make just one.
- Consolidated payments are usually smaller than what you are currently paying to all of your creditors.
Therefore, consolidated payments are very helpful because they reduce the chaos often associated with debt problems, thus restoring your ability to think clearly. As the saying goes “An organized environment equals an organized mind”. You are also paying less per month which saves you money.
Keep in mind though, that consolidating creditor payments is a key feature in other debt help options. Some of these other debt options, which I’ll talk about shortly, have consolidated payments that are up to 80% less than what you are paying now.
Lower your interest rates
If you have scanned your latest credit card or line of credit statement, you have probably noticed extremely high interest rates. It’s not uncommon for me to see 28% interest rates attached to client credit cards. If you have high interest rates it’s because the creditor has deemed you a credit risk and is charging you accordingly.
Once again, if you are able to reduce the interest rate, it is easier to pay creditors back more quickly because it slows down the ballooning of your debt. This means more of your minimum monthly payment goes toward paying down the total amount owing. Generally speaking, Debt Counsellors (Credit Counsellors) strive to lower your interest rates usually to within the 5 – 10% range. Very occasionally they can achieve 0%, but this appears to be an exception and not the rule.
Thus, it is worth repeating, Credit Counsellors regularly do not achieve a 0% interest rate.
Bringing your overdue accounts up-to-date
This can be helpful but isn’t something I regard as a key feature for two reasons. Firstly, your past history of defaults remain on your credit report and are reflected in your credit score. If you have been in default for sometime, a significant amount of damage may have already occurred to your credit score.
Secondly, because you have changed the terms of the agreement between you and creditors (reduced interest rates and lowered minimum payments) this is usually noted on your credit history and can further reduce your credit score by a significant degree.
Who Funds Non-Profit Credit Counselling Organizations?
As per selected webpages from non-profit Credit Counselling organizations, banks (holders of credit cards, lines of credit, personal loans) and other creditors provide 70% of their funding. So, although various Credit Counselling organizations claim to be non-profit, are they non-biased?
It’s important to understand “who” is paying for “what” because funding sources will determine, to a large degree, an organization’s purpose, mandate, and type of services offered. As a result, you may want to ask if there is a conflict between what is best for you and what is best for your creditors.
Various Credit Counselling organizations also advertise that they provide services “for free”. However, in filed annual reports it is documented that 23% of funding comes from clients. Based on this information, it seems to stretch credability to claim they are free. Therefore, if you decide to use credit counselling, I would ask if they are adding any type of fee into your consolidated monthly payment.
Summing it all up: My Opinion As A Debt Reduction Specialist!
Below are some of my opinions, based on my experience in the debt help industry but, ultimately, you need to form your own. My hope is that this article has helped in some small way.
First, 70% of Non-Profit Credit Counselling Organization’s funding is provided by your creditors. Remember, their Debt Management Plan is a strategy to pay creditors back in full. That is their plan – they only have one! This plan doesn’t usually reduce interest rates to 0% nor does it reduce the total amount of debt owning. And your credit score is seriously affected, regardless.
Second, 23% of their funding comes from clients as per published annual reports. Therefore, it is my opinion that they are not free.
I recommend clarifying your financial goals before choosing any type of debt help. Your financial goals will guide your decision by helping you determine which debt solution will achieve said goals.
Credit Counselling can be very helpful but isn’t the best solution for everyone.
If you have a manageable amount of debt, Credit Counselling might be a good way to get out of debt and achieve your financial goals.
It has been my experience that credit counselling is not aggressive enough for hefty amounts of debt and I think it’s unrealistic for a person to be on a Debt Management Plan for 10 years – especially when the budget is really tight!
The best way to determine if Credit Counselling offers enough debt help is to:
- Develop a budget based on new debt payments structured by the Credit Counsellor’s Debt Management Plan.
- Determine how much money, on a monthly basis, has been freed up.
- Determine if it reduces your debt payments enough to create a realistic amount of surplus money every month.
If you are considering the payment plan provided by Credit Counselling, you may want to ask yourself the following questions:
- Can I keep up with these payments?
- Has this new payment plan gotten rid of my stress and anxiety about money?
- Am I able to put money into my RRSP, RESP, TFSA, Emergency Fund, Vacation Fund, and the like?
- Am I able to pay down my mortgage with a couple of extra payments every year?
- Will I still be worried about how to buy my children clothing for school?
Ultimately, the debt solution you choose is up to you and should be based on your financial goals and whether or not the debt payment is reduced enough to ensure you have a good quality of life.
My Recommended Debt Reduction Solution: The Debt Diva Difference
My preferred method of debt help is to avoid the flawed credit counselling model entirely and provide actual debt reduction, because people need to move on from their debt crisis quickly. Since I don’t work for your creditors or the bank, I can work towards reducing your debt by as much as possible – sometimes up to 80%.
This debt reduction approach accomplishes three key things:
- Removes your debt burden therefore freeing up money every month
- Gets rid of stress and anxiety.
- Helps you focus on your future again.
All three of these things greatly enhance the quality of your life.
However, a significant amount of my work also focuses on clarifying goals and values because every client wants to get out of debt and stay out of debt in the future. Therefore, The Debt Diva Difference focuses on empowering you to understand your debt options and embarking on a path to greater financial (and ultimately) personal well-being.
Feel free to contact me if you want to find out how much debt I can reduce for you.