You’re avoiding the mailbox because you don’t want to see another bill. You’ve put your cell phone on vibrate to silence those annoying collection calls. And you're not looking at your savings account because you don't want to get depressed. If you’re like the average Canadian who owes over $8,500 in consumer debt, you may be thinking credit consolidation is the answer. But Google “credit consolidation” and you’re not likely to find much help. That’s because the term is often used interchangeably with “debt consolidation.”
Now that we’ve got our terminology straight, what exactly is debt consolidation and how do you know if it’s right for you?
Debt Consolidation in a Nutshell
A Debt Consolidation Program (DCP) can offer financial relief by wrapping all of your unsecured debt (monies owed without equity attached, such as credit card debt or medical bills) into one manageable monthly payment. A qualified credit counsellor will take care of the details, working with your creditors to eliminate and lower interest rates.
What are my responsibilities?
While your dedicated counsellor takes care of negotiations with your creditors, you’re not completely off the hook! When you sign onto a DCP, you'll also learn a few money management techniques, so you don’t wind up in a similar situation later down the road. Your counsellor will work with you to help you do each of the following:
- Create a personal monthly budget that works for you—and give you specific tips to help you stick to it.
- Track your income and expenses, so you know exactly what you have coming in and going out, which automatically helps you to control your spending habits.
- Set realistic financial goals. (After all, Rome wasn’t built in a day!)
How long will the DCP last?
Your counsellor will work with you to understand your personal financial situation and set reasonable expectations, but most clients are able to repay their debts within 24 to 48 months. This takes years off paying down your debt just by making your monthly payment; it also shaves away money wasted on interest fees—sometimes thousands!
Do I need to give up my credit cards?
This one initially scares many of our clients, but once they master maximizing the money they have, they soon realize living without credit cards isn't so difficult.
When you're on a DCP, yes, you do have to give up using your credit cards—but only temporarily. And the truth is by the time most people come to see us, they've already maxed out their credit cards anyway, so they don’t have access to credit regardless of whether or not they're on a DCP. You might as well pay off your debt if you can't get credit, so that one day you can—and we'll help you with that too once you're done the program! The repayment process is designed to not just eliminate your debt, but to help you learn how to use credit to your advantage. Our clients learn to live by cash or with bank debit cards or pre-paid or secured credit cards. After completing their DCP, many clients have told us that they continue to live happily credit card free!
Is debt consolidation the same as taking out a loan?
Confusion abounds here; that’s because there are debt consolidation programs and debt consolidation loans. A loan involves having a lender pay off all your debt, which means you’re then indebted to the lender. To get a debt consolidation loan, you usually need to be considered creditworthy, which unfortunately, isn't the case for most of our clients. But, perhaps that’s for the best; after all, borrowing is what put you into this predicament in the first place. A true DCP can give you the skills you need to become a personal finance pro, while eliminating your debt over time.
How will debt consolidation affect my credit?
A non-profit credit counselling agency will not report to the credit bureaus (Equifax and TransUnion) that you have signed onto a DCP; however, there's a good chance that your creditors will. If and when that happens, your credit rating will be affected but most of our clients have poor credit anyway, so it doesn't really matter. The good news is that by entering into a DCP, you'll start to eliminate your debt, which helps improve your credit rating over time. And once you're done, your counsellor can put you on a direct path to rebuilding your credit and raising your score.
How can I tell if I’m getting scammed?
Credit repair scams have been on the rise; unfortunately, when someone is vulnerable and in a bad situation, there’s always someone looking to take advantage of that. Most of these scams involve telling you they can erase your bad credit—for a fee—or offer you a loan that you can put toward your debt (of course, the loan never comes). We’ve identified all the ways you can spot—and avoid—those credit repair scams here.
Studies show that over 40 percent of Canadians list “money” as their greatest life stressor. It’s causing them to lose sleep, reconsider past financial decisions, argue with partners, and lie to family and friends. Don’t let this happen do you! If you’ve made it this far and decided debt consolidation might be right for you, reach out today. Better financial health may be just a phone call away.