Debt! Why the horrible reputation?

BY: ANDREW STEWART 

On the one hand, everyone needs it at some point to finance their education, buying a home or starting a business. On the other, too much debt can be risky or even dangerous. Governments and companies have debt just like we do. And like us, governments and companies sometimes spend more than they earn, giving them a high debt-to-income ratio. Everyone at some point may need debt to pay for things coming up that they can’t afford based on their current cash flow. Going to school? You’ll need a loan (debt). Want to buy a car? That’s another loan and debt to be paid. In order to manage your own finances better, you have to know how the system works. Understanding things such as your credit score, the importance of on-time payments and credit utilization will help you make smart decisions and set yourself up for financial success. It’s okay to have debt — you just need to manage it intelligently.

What is a credit score?

These magical numbers can define our financial status in the eyes of many. You probably could be thinking, why should I care? Well, I’m going to hopefully shed some light on why you should. Credit scores can range from 300-900, and the higher the score, the better. But what do those numbers even mean? In Canada, we have two credit reporting agencies-Equifax and TransUnion.  They collect information on consumers like us on when we pay our bills and how long it takes us to pay our bills before recording this in our files. There are five main things that impact your overall score:

• Your payment history
• How much credit you have available
• Length of credit history
• Number of inquiries (to receive further credit)
• Types of credit (loans, credit cards, etc.)

Did you know that the average credit score in Canada is 749? Are you above or below that?

Your credibility as someone who desires a loan relies on this all-important number. Here are two easy steps you can do to improve your credit score.

1. If you haven’t been making consistent payments, start today! Set up pre-authorized payments on all of your bills, especially the ones that report to the bureau (mortgages, student loans, auto loans, and credit cards). These can also include your utilities, cell phone, insurance, etc. Oh, and surprise, surprise – paying your bills on time accounts for 35% of your credit score.
2. Try to keep at least 25% of your credit limit available at all times. The amount of credit you have available is more of a factor than you might think. Often times, we run up balances our cards unaware of the damages it can cause. So, what is credit utilization? Credit utilization is the ratio of your credit card balance to your credit limit as listed on your credit report. So, if you have a combined credit limit of $10,000, keep your total balance under $7,500.

Avoid incurring holiday shopping debt

The holiday shopping rush will soon be on and paying with a credit card makes it is easy to be in the spirit of buying and giving without paying attention to how much money is being spent. If you can’t afford to pay off your credit card in November, you can’t afford to add a lot more to it in December. Generosity to friends or the perfect gift for the family are not good reasons to put yourself deeper into debt. If you must use a credit card to pay for Christmas, make sure you can pay it off by Easter.

The best way to stick to your budget and avoid impulse spending is to pay in cash. Pulling cash out of your wallet or purse and handing it to someone else is painful, and a reminder that the less you spend, the more you can keep.