The True Cost of Credit Counselling

What are the True Costs of a Credit Counselling Program?

Credit Counselling is a prevalent method adopted by individuals to manage and repay their debts in full. However, there is growing debate around its efficacy and impact on an individual’s financial health. This article aims to shed light on The True Cost of Credit Counselling and help you make an informed decision.

A Real-life Story: The Case of ‘Janice’

Let’s start our exploration with a real-life case study. We will refer to our subject as ‘Janice’ for confidentiality reasons.

The Debt Situation

Janice had amassed a total of $66,500 in unsecured debts, including two traditional bank loans and a Visa line of credit. In search of a solution, she reached out to a renowned credit counselling agency in Canada.

The Plan Proposed

The credit counselling agency suggested a debt consolidation program that required Janice to make monthly payments of $1,232 for five years.

The Calculation Method

The agency arrived at this figure by dividing Janice’s total debt ($66,500) by the program duration (60 months), which resulted in a $1,108 monthly debt repayment. Additionally, the credit counselling agreement mandated an extra 10% monthly contribution of all funds deposited in trust. This added a further $123.20 to Janice’s monthly payment, bringing the total to $1,232.

Affordability Check

Unfortunately, Janice’s budget only allowed for a monthly debt repayment of $645, as per the documents provided by the credit counselling company. The proposed plan required 171% of the available budget, which was clearly unaffordable for Janice. Within two months, she defaulted on her payments.

The Consumer Proposal Alternative

In contrast, a consumer proposal proved to be a more viable option for Janice. By this point, her debt had increased to $63,000 due to the accumulation of interest. A proposal was suggested that required her to repay only $24,000 of her debts, at the affordable monthly rate of $400. This proposal was accepted by her creditors, resulting in a savings of $49,920 over five years when compared to the credit counselling program.


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Potential Consequences of Credit Counselling

Ongoing Interest Costs

Contrary to popular belief, credit counselling does not necessarily guarantee the suspension or cancellation of interest or service charges. Participation is voluntary, and creditors may choose not to waive interest costs. This could result in the debtor still owing money to creditors after the program’s conclusion.

Credit Impact

Credit counselling agencies often claim that their programs are less damaging to credit scores than consumer proposals or bankruptcy. However, entering a debt repayment program can lower your credit rating or credit score. Furthermore, individuals are usually required to refrain from applying for additional credit while participating in the program.

Repairing Credit Sooner with a Consumer Proposal

Despite the immediate similarities in credit score impact, the long-term effects of a consumer proposal can be more favourable than credit counselling. For instance, in Janice’s case, she was able to complete her proposal in just over three years by repaying $600 per month. This allowed her to begin her credit recovery sooner than if she had stuck with credit counselling.

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Is Credit Counselling the Right Choice for You?

Credit counselling can be a viable solution under certain circumstances, such as:

  • You owe a small sum to a few creditors.
  • You only need assistance with one or two debts.
  • You are not insolvent, possibly due to having more equity in your home than debts.
  • You can afford the total monthly cost of the program until its completion.

However, if you find yourself in a situation similar to Janice’s, it may be in your best interest to consult with a Licensed Insolvency Trustee to explore the potential benefits of a consumer proposal over credit counselling.

In conclusion, understanding The True Cost of Credit Counselling is vital when determining the best course of action for resolving your debt issues. Always weigh your options carefully and consult with a financial adviser or credit counsellor before making a decision.

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During our initial meeting, they took the time to understand my debt and financial circumstances. They explained the various options available to me and helped create a personalized plan that would be most beneficial for my situation. With their assistance, I was able to avoid declaring bankruptcy by presenting a consumer proposal to my creditors. Fortunately, my proposal was accepted, and I am extremely relieved to finally be free of debt, all thanks to BankruptcyCanada. The burden on my shoulders feels significantly lighter now, and I truly believe that Bankruptcy Canada has the most skilled specialists in debt relief.