Should you use a credit counselling service?

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Let’s start by defining what “credit counselling” is. It is a process that involves offering education to consumers about how to avoid incurring debt and helping debt repayment by establishing an effective debt management plan and budget.

Written like this, it might sound interesting and appealing, particularly if you are in a difficult financial situation. Unfortunately, the majority of credit counselling agencies do not have your best interest at heart, including the ones claiming to be “not-for-profit”.

The main goal of these services is to set you up on their “in-house debt repayment plan”….and cashing-in on your dollars. With a debt repayment plan, the service will contact your creditors on your behalf, and either offer a lump-sum payment on your debt, or arrange for a monthly payment for a number of years.

This is never done for free, including at so-called not-for-profit societies. Did you know these organizations receive the majority of their funding from banks, credit card companies and other financial institutions? And where do you think this money is coming from? Yep, you got it…. from you!

Some agencies can receive up to 50 cents on every dollar they collect on behalf of your creditors. On top of this, they will charge you a monthly administration fee, to cover for their overhead costs. People working there are not volunteers, they are employees.

Back in 2008, when my own financial situation was getting desperate, I went to see one of these agencies. Of course, the “debt repayment plan” was the only way to go, even if it was not adapted to my problem at the time. The proposed monthly payment was too high compared to my then income. It also included a $40 administration fee I disagreed with.

I never signed-up for it, despite several follow-up calls from the company. I am glad I didn’t, as it would have trashed my credit score and put me in a worse situation, financially speaking. Credit bureaus treat debt repayment plans the same way as a consumer proposal or a bankruptcy. It will stay on your file for at least 6 years.

If I had done this, I would have probably never been able to buy my condo. I don’t think highly of this kind of services. Credit counselling agencies are nothing more than collection agencies, minus the harassing part.

If your financial situation is getting to this point, you are better off meeting with a Trustee in Bankruptcy to review your options. Because you are going to see a Trustee doesn’t mean you have to file for bankruptcy. Bankruptcy is definitely not the only way  to get out of debt

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