Credit Counselling VS Debt Consolidation

Credit Counselling VS Debt Consolidation: The Ultimate Guide

When drowning in a sea of debt, the first thing that most individuals seek is an effective debt management strategy. Two popular options that often come up are Credit Counselling and Debt Consolidation. Although both methods serve to combine your debts into one, they are quite different in their approach and may not always be the best solution depending on your circumstances.

Let’s dive deeper into the intricacies of Credit Counselling VS Debt Consolidation and understand which method might be the best fit for your situation.

Understanding Debt Consolidation

Debt Consolidation is a broad term that encompasses the amalgamation of multiple debts into a single new debt, which could be a loan or a settlement.

Traditional Debt Consolidation

Traditional Debt Consolidation loans are usually provided by banks or other financial institutions. As the bank is lending money to you, they generally require collateral of an asset. Moreover, a strong credit score is a necessity to qualify for a Debt Consolidation loan.

Remember to carefully understand the repayment terms of your loan. The interest rates may vary, and if your credit history has been impacted, you may not qualify for the “best rates”.

Understanding Credit Counselling

Credit Counselling, on the other hand, consolidates your debts into a settlement program. A credit counsellor facilitates a repayment plan for you to pay off your debts in full. There may also be a break on the interest charged from banks that fund the credit counsellor.

Credit Counselling programs are often provided by credit counsellors. Some counsellors operate on a for-profit basis while others are non-profit. It is crucial to remember that all credit counsellors charge fees for their services, regardless of whether their organization is non-profit or not.

What Debts Can I Consolidate?

Both bank consolidation loans and credit counselling plans can be used to pay consumer debt. This includes debts for credit cards, payday loans, overdrafts, etc.

However, when it comes to government debts, the only debt consolidation option available is a specialized debt settlement tool called a Consumer Proposal. A Consumer Proposal can consolidate and write off both consumer debts as well as tax debt, student loans, and more.

The Cost Factor

While both consolidation loans and credit counselling programs require you to pay back all of your debt, the key difference lies in the interest and fees you are charged.

Consolidation Loan

If you qualify for a consolidation loan at a reasonable interest rate, it might cost you less to repay all of your debt through the consolidation loan than if you continued to repay each debt separately. Normally, there is no cost to apply for a consolidation loan.

For example, if you had debts totalling $10,000 that you repaid in full over three years at an interest rate of 18% (compounded annually), you would pay approximately $360 per month for three years. However, if you used a debt consolidation loan to repay your debt in full over the same period at an interest rate of 12% (compounded annually), you would pay around $330 per month for three years.

Credit Counselling

On the other hand, most credit counsellors can negotiate an arrangement with your creditors that stops them from charging future interest. Typically, you will end up paying back 100% of the debt you owe, plus the fees and other levies the credit counsellor charges you.

For instance, if you used a credit counselling program to settle your $10,000 debt with no interest charges, you would pay around $277 per month for three years, plus the counsellor’s fee.

If any of your creditors do not agree to participate in the plan your credit counsellor proposes, those debts will have to be paid separately in addition to the settlement payments to your credit counsellor. If you’re faced with Government debt, be aware that debts to Canada Revenue Agency for income taxes, student loans, GST, etc., cannot be dealt with by a Credit Counselling Plan.

How your Credit History is Impacted

Consolidation Loan

Using a consolidation loan to manage your debt may actually help improve your credit rating, provided you make all your payments on time. However, the challenge is that unless your credit rating is “ideal” you will probably find it difficult to qualify for a consolidation loan.

Credit Counselling

The use of a credit counselling program will reflect on your credit history for 2-3 years once your settlement is finished, or 6 years from the date you defaulted on your accounts (whichever comes first). This is similar to the impact of a Consumer Proposal consolidation, even though you have to pay back all your debt in a credit counselling plan.

Anytime you don’t pay your debts off in full at the agreed-upon terms your credit history is going to take a hit. The key to remember is that sometimes a relatively short-term hit can make a positive impact in the long-term.

Exploring Other Consolidation Options

Neither bank consolidation loans nor credit counselling settlements can reduce the amount of debt you have to pay or legally bind your creditors. Therefore, these options may not work for you if you are unable to repay 100% of your debt within 2-5 years, your creditors are threatening legal action, you need to deal with a government debt like taxes or student loans, or you are uncomfortable working with a lender or an agency that receives most of its funding from lenders.

Consumer Proposals can be a successful alternative to traditional debt consolidation loans and credit counselling programs. A Consumer Proposal can:

  • Consolidate virtually all debts (including government debt)
  • Cut the amount of debt you have to repay
  • Stop all future interest
  • Legally bind your creditors

Learn more about Consumer Proposals here.

To better understand and plan your debt-free journey, consider setting up a meeting with a debt professional today.

Book your free debt consultation now.

Credit Counselling VS Debt Consolidation: A Comparison

Credit Counselling Debt Consolidation
What it does Consolidates your debts into a settlement program Combines multiple debts into one new debt
Who it’s for Individuals with consumer debts who can pay back the full amount Individuals with a strong credit score who can provide collateral
How it impacts your credit history Shows on your credit history for 2-3 years after settlement, or 6 years from the date of default May improve your credit rating if payments are made on time
Cost You pay back 100% of your debt plus the counsellor’s fees You may pay less if you qualify for a reasonable interest rate
Government debts Cannot deal with government debts such as taxes, student loans, GST, etc. Cannot deal with government debts

Wrapping Up

Whether you choose Credit Counselling or Debt Consolidation, the key is to understand which method is a better fit for your financial situation. Make sure you are well-informed about the advantages and disadvantages of each option before making a decision.

Remember, the ultimate goal is not just to get out of debt but also to stay debt-free in the long run. Therefore, along with managing your current debts, focus on adopting healthy financial habits that will help you avoid falling into the debt trap in the future.

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