Credit Chaos

by Kristina Tahnyak on July 21, 2010 · 2 comments

lightningOver the last few years during the financial crisis people have lost their jobs, homes, and in some cases their families.

When our backs are up against the wall, it is in human nature to look for a quick fix…a band aid solution that helps temporarily but does not heal long term. A quick solution to a personal financial crisis is to use credit in the shore term, in the hopes of finding a job in the long term and being able to repay the debts.  But, what happens when your income does not support the debt repayment?

There are usually two options (other than filing for bankruptcy) for people who are drowning in debt; a consolidation loan through a financial institution, or a consumer proposal through a credit consolidation company.

A consolidation loan is a personal loan that is authorized by your financial institution to consolidate all of your various debts into one easy payment. This is the best option for your personal score and the most hassle free choice of the three options.  However, many financial institutions have stopped offering credit consolidation loans to clients due to the high default rate.  The interest rate on a credit consolidation loan is generally higher than other types of personal loans but it is lower than the usual 19% on a credit card.

Credit consolidation loans are also very difficult to get approved. If a client is already drowning in debt, the odds of another financial institution granting more credit are very slim. I always tell my clients when they are pre approved for credit to always take it, even if they don’t need it at that time. Because when they do need it, their situation may be less desirable, and therefore the loan will not be approved. As long as the payments on a credit consolidation loan are made on time your credit score remains excellent.

There are no negative impacts on your credit score, and the only paperwork required are all of your credit card, loan, and line of credit statements.  All previous credit cards and loans/lines of credit will be closed.  Once the credit consolidation loan is paid off over a maximum of 5 years, clients can begin to rebuild their credit.

A consumer proposal is filed via a credit consolidation company. It is not a consolidation loan, as consumer proposal companies are not financial institutions.  A consumer proposal is handled by a third party who will negotiate with your creditors to lower the interest rate on your debts.  A lower interest rate means that the payments will go towards the principal debt and therefore the balance owing will be paid off faster.

Similar to a consolidation loan, all of your credit cards and loans will need to be closed.  However, unlike a consolidation loan, a consumer proposal has a negative effect on your credit bureau.  It is not the same as declaring bankruptcy but it has the same negative effect without the bad stigmatism that bankruptcy can have.

A credit consolidation company will pay off the debts on your behalf; and your monthly payments will be made directly to the credit consolidation company, along with their usual 15% fee.  The interest rates on your debts will be lowered but the fees for a credit consolidation can be costly.

A consumer credit proposal is less desirable than a consolidation loan because of the negative affects it has on your credit score.  However, if a credit consolidation loan is not available then a consumer credit proposal maybe the only option.

IMPORTANT: Make sure to research exactly what you’re getting into before you sign any paperwork! There are some very good banks and institutions out there that can help you out and get you back on track, but there are even more really really BAD ones that will prey on you. So please do your research and understand what you’re getting into before jumping in :)

(Photo By ElGarza)

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{ 2 comments… read them below or add one }

1 Tim July 24, 2010 at 1:51 am

must be another lexicon difference between you loonies and dollar folk. we have both credit consolidation companies and consumer credit counseling services (cccs). your definition of credit consolidation company is more akin to our cccs, where cccs sends your creditors repayment proposals in return they lower interest rates. you then pay cccs monthly and they distribute the funds to the creditors that have agreed to the proposals. this may or may not hurt your credit score in the long term; however, during your enrollment, you will not be able to get credit since your reports are annotated as undergoing cccs. your credit score will be damaged based on how the creditor accepting the proposal deals with the credit. some creditors like amex will forgive all interest on the back end so long as payments are made until the debt is paid off, but then they will do a sneaky thing which they do not tell you, and report the debt as being “charged off”, which has the 7.5 year ding on your credit report. other companies do not annotate as a “charge off”, so once paid off, if the acct will have the status it had to begin with. once you terminate cccs, your credit reports will cease to be annotated with cccs and you will be able to regain credit (caveat is that you will be able to get credit so long as your credit score wasn’t shot up by being delinquent prior to enrolling in cccs). cccs charges a nominal fee and receive “contribution” funds from the creditor(s). they are supposed to be non-profit. DO NOT think cccs actually counsels you nor takes proactive interest in your debt. They DO NOT. it is not a pay, forget and let run on automatic pilot program. They DO NOT counsel, and they DO NOT keep tabs on payments lost in the mail, changes in payment addresses, etc.

conversely, for profit consolidators can be very expensive and more often than not they cannot do anything more than either you can do through negotiating with the creditors or going through cccs for far less expense on your part. they may also not have your best interest at heart and there seems to be more unscrupulous consolidators out there than not. they may negotiate charge offs galore or negotiate with debt collectors that aren’t necessarily in your favor. Either way, expect 7.5 yr dings on your credit report. 7.5 years to me might as well be 10 yrs neg that bankruptcy yields. 2.5 years doesn’t make much of a difference, so I would say if you are in a bad way bankruptcy is far better, because you at least can get the debt erased for the most part with equivalent hit to your credit.

2 Tim July 30, 2010 at 9:01 pm

How timely…a new law on debt consolidators will take effect on October 27 this year, which the FTC announced yesterday. New points:
-Debt consolidation/settlement companies (note, not cccs) cannot charge an upfront fee for their service. They can only charge a fee if in fact the debt has been reduced, settled or renegotiated.
-If a company requires up front money in a separate account as sort of advance money, the account has to be maintained at an independent financial institution under the consumer’s name. The person has to be able to withdraw the money at any time without penalty
-$16k fine per violation for the debt settlement/consolidation company

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