By now, you may know that a Debt Consolidation Program (DCP) is an arrangement with a not-for-profit credit counselling agency. The agency will negotiate with your creditors to either reduce the interest on your debt or drop it down to zero, and then combine all your debts into one monthly payment. But there may be some things you didn’t know about DCPs, so we’ve rounded up seven common misconceptions and other little-known facts and benefits about DCPs.
7 Surprising Facts About Debt Consolidation Programs
1. You Can Use a Secured Credit Card on a DCP
While you’re on a DCP, you will need to surrender your credit cards, but most people entering a DCP have already maxed out their credit cards anyway, so they're useless.
However, you can get a secured credit card while you're on a DCP, in case you ever need to book a hotel or rent a car. These cards work just like a regular credit card, except they require an initial money deposit as collateral (usually $100-$500). This deposit assures creditors you'll pay back the money you borrow. When you use the card to make a purchase, it’s not deducted from the deposit like a prepaid card. Instead, you pay the balance just like you would a regular credit card.
A secured credit card helps you rebuild your credit, and once you've successfully completed your DCP, you might be able to upgrade it to an unsecured one. Just note that a prepaid credit card is not the same as a secured credit card; a prepaid credit card does nothing to help your credit.
2. Many Credit Counsellors are Certified Professionals
When you enter a DCP with a reputable, non-profit credit counselling agency, you’ll be working with a certified Credit Counsellor, not just phone operators. Look for certifications by the Association for Financial Counselling & Planning Education (AFCPE), which ensures a Counsellor has been rigorously trained and certified to meet the highest standards. These certified Credit Counsellors will also give you valuable money management skills that will help you move forward with your financial goals following the successful completion of your DCP.
3. Bankruptcy Remains an Option
A Debt Consolidation Program is preferable over bankruptcy for many reasons. Bankruptcy completely kills your credit, keeps it that way for six years, and makes it extremely difficult to rebuild. It also takes non-exempt assets, such as RRSP contributions and tax refunds, and seizes any equity you have in your home. However, some people worry they won’t be able to afford the monthly payments through a DCP, so they think bankruptcy is their only option. The good news is if you enter a DCP and find yourself unable to make your monthly DCP payments, you can still file for bankruptcy. If you can salvage your credit a bit, you might as well start with a DCP, and if that doesn't work out, you can always look at bankruptcy as an alternative option.
4. There Are No Loans Involved
A Debt Consolidation Program is not the same as a debt consolidation loan, which involves taking out a loan to pay off your debts, generally through a bank, credit union, or finance company. So rather than paying numerous loans of varying sizes and at various interest rates to any number of creditors, you would use the debt consolidation loan to pay off all your creditors, and then just focus on paying off the one large debt consolidation loan at a single interest rate to the one lending institution that gave you the loan. With a DCP, however, there are no loans involved. You simply send your money to the non-profit credit counselling agency managing your DCP, then they disperse it to each of your creditors until all your debts are completely paid off.
5. Secured Debt is Not Included
A DCP combines unsecured debts, which includes credit cards, lines of credit, utility bills, payday loans—basically debt not tied to an asset, like a house or a car, that can be seized in case you don't make your payments. Secured debt, on the other hand, is tied to a specific piece of property, which can be reclaimed if payments aren’t made. This includes mortgages and car loans, and these cannot be included in a DCP. Instead, the DCP makes your unsecured debts much more manageable, improving your ability to continue paying your secured debts in a timely manner. And keep in mind that home and auto loans generally have much lower interest rates than unsecured debts, like credit cards.
6. Not All Agencies (or DCPs) Are Created Equally
Non-profit credit counselling agencies offering DCPs or debt management programs range in quality, as well as the types of perks they include in their programs. For example, at Credit Canada, we offer free credit building help once you've successfully completed our Debt Consolidation Program, and in some cases, an unsecured credit card as well. Our Counsellors also check in with their clients to make sure their budgets are working for them, and if not, help make any necessary adjustments.
You want to be sure you’re working with a reputable non-profit credit counselling agency that can provide you with all of the help and support you need to successfully pay off your debt, before of course signing the dotted line. So first and foremost, shop around for an agency that is a non-profit organization (NPO). NPOs don't stand to make a profit from you, and any fees you pay to the agency will not only be minimal but also go directly towards covering the costs of managing the DCP.
7. DCPs Are For Everyone, If It's the Right Fit
There is definitely a stigma or misconception around debt. Some people might think people who have debt aren't big earners, or they don't know how to manage their finances, or they are reckless spenders. But the truth is debt doesn't discriminate.
At Credit Canada, we have served clients from all walks of life—professional athletes, actors, comedians, celebrity personalities, lawyers, teachers, doctors, single parents—you name it. And sometimes life happens, and all of a sudden smart, educated, and prepared people who have successfully managed their finances all their lives can find themselves in financial distress due to any number of reasons, such as medical emergencies, ailing family members, unexpected job loss, new life changes, etc. — the list goes on.
A DCP can be the best and smartest solution for anyone, depending on their particular financial situation and their future goals, and a certified non-profit Credit Counsellor can tell you if it's the right solution for you.
There you have it, seven things you might not have known about DCPs. Interested in learning more or just looking for some free general financial advice? All you have to do is give us a call at 1.800.267.2272 and we’ll book you a free counselling session with a certified Credit Counsellor who truly cares.