Credit Counselling: Modernizing A Hidden Gem in Financial Services
Deep in Debt
Over the past decade, Canada has seen unprecedented increases in consumer debt. Statistics Canada data shows that Canadians now have $1.70 in debt for every $1.00 of disposable income. This is a record high for Canadians and up about 70 per cent from 20 years ago.
For those who have leveraged themselves at high-interest rates, it is extremely challenging, if not impossible, to meet important financial and personal life goals such as paying down student loans, saving for a downpayment for a home, and retirement. In fact, a recent Canadian Payroll Association survey indicated that 40% of Canadians feel overwhelmed by their level of debt. For those struggling with debt, there aren’t typically many options. Creditors and banks may offer debt consolidation or low-interest rates on balance transfers but this is a short-term relief.
The majority of balance transfer teaser rates only last 3–6 months and quickly rise thereafter. Many will need a more sustainable solution and require additional help to become debt free.
A Hidden Solution
For decades, credit counsellors have filled this gap of helping those with more significant debt challenges. Broadly, these credit counsellors work directly with clients to help find solutions to financial challenges and problems from debt repayment programs to bankruptcy filings. These credit counsellors can play a significant role in helping clients regain financial health. For example, the Credit Counselling Society, Canada’s largest non-profit charitable service, has helped clients repay $374M in their nearly 20 years of operation. An average client had $30,000 in non-mortgage debt with 7 creditors and paid off in 1.5 years. They have partnerships with dozens of creditors which allow them to negotiate discounts on debts on behalf of their clients.
There are a few challenges, however, with credit counselling. First, there are no mandatory educational requirements to become a credit counsellor which allows for predatory counsellors to exist. A trustworthy credit counselling organization is typically registered as a non-profit and accredited by the Better Business Bureau.
As well, credit counselling is something that most people in debt just don’t realize is an option to them. The process is also time-intensive and difficult to scale. There needs to be a way to use technology to embed the service that credit counselors have traditionally provided to reach more people at a lower cost.
Emerging Solutions
Across the world, we’re beginning to see innovative solutions in this space. For example, Payoff offers The Payoff Loan which is a personal loan between $5,000 and $35,000 designed to eliminate or lower credit card balances. Their lower operating costs enable them to charge lower interest rates to the customer. Lendstreet, a venture that recently raised $117 million, helps people get out of debt, rebuild their credit, and get a fresh start by negotiating with creditors on the customers’ behalf to refinance an old debt at a discount.
Credit counselling organizations and emerging debt counselling startups have developed a meaningful solution for a vulnerable segment. Increasing awareness of such services, integrating them into the broader financial services ecosystem, and identifying the right people who would benefit from their services will benefit every stakeholder, including the lending institution itself that might risk losing the principal if not for the services of a credit counsellor.
As with traditional credit counselling organizations, we have to make sure we’re mindful of which of these startups are designed to truly benefit the financial health of their users and which ones are designed to profit off their vulnerability.
