How Does Credit Counselling Affect My Credit?
Misinformation abounds regarding debt relief options in Canada, which means that many Canadians make decisions about their finances based on incomplete or inaccurate information. Because of this, many people fall into the wrong debt solutions and inadvertently cause long-term financial difficulties for themselves by choosing a strategy that is not really suitable for their specific situation.
Credit counselling, in particular, suffers from being widely misunderstood because of incorrect information floating around. Especially misleading is the false idea that unlike other debt relief solutions such as the consumer proposal, credit counselling does not have any damaging effects on one’s credit. In fact, credit counselling services DO negatively affect your credit, and potential creditors will know that you have been in a debt management plan—credit counselling—for up to three years after the plan is settled because that is how long the credit counselling history remains on your credit report.
The True Effect of Credit Counselling on Your Credit
A Canadian consumer cannot enter a debt management program such as consumer credit counselling and escape notice from present and future creditors. When you sign up for a credit counselling service, a note is made on your credit report that indicates you are currently enrolled in a special program to manage your debt repayment. That note will make it harder to qualify for new credit while you are still repaying the debt covered under the credit counselling agreement.
Once your debt is repaid, the note does not immediately drop off your credit report. Instead, it remains there for 2-3 years, alerting potential creditors that you have had difficulty paying your debts in the past. The fact that the note remains on your credit report is similar to the way in which a notice of bankruptcy or a consumer proposal remains on your credit report.
Of course, a note indicating that you filed for bankruptcy is a much bigger red flag for future creditors than a debt management program. You are all but guaranteed not to qualify for any loans that feature a low, competitive interest rate if you have filed for bankruptcy within the past seven years.
Is the Effect on My Credit a Bad Thing?
Be careful jumping to the conclusion that it is always a bad thing for your credit to suffer a bit while you are in the midst of paying back your debt. The very fact that the ding on your credit causes lenders to look into you more thoroughly as a potential borrower means that they will be less likely to rush you into a loan that you cannot really afford. Also, the negative impact on your credit score is often blunted when you consider the amount of money you save by entering a debt relief program instead of trying to solve the problem itself. This is especially true for debt settlement programs. While the notice of settlement remains on your credit report, you may have some difficulty qualifying for new loans. However, the savings you enjoy due to principal reductions that settle your debt for far less than what you actually owe make the a temporarily low credit score well worth it.
Carefully Consider Your Options
It might be difficult for you to decide which debt solution is right for you and why. Fill out the debt relief application to learn more about your options and to find out which solution is right for your unique situation.