How to Put Practical Debt Advice to WorkJan 31, 2018
Most people who make a New Year’s resolution will quit before February is over. If you have a resolution to reduce your debt load this year, here are some practical ways to do so, and some specifics about why you should.
Practical ways to reduce debt
Dreaming about being debt free won’t get you far, but here are some practical things that can help you reduce your debt.
- Understand your total debt load to understand the job ahead of you, and the timeline you’ll need.
- Rethink how you view your credit card. It’s not a borrowing tool, it’s a payment method. Aim to repay in full within one or two months maximum. And always make more than minimum payments to avoid the consequences of lagging consumer debt interest.
- Be your own best (financial) friend when it comes to mortgage amounts. Don’t over-borrow for a home. New mortgage rules mean lenders are implementing new stress tests for borrowers, but you can do it yourself. Go to the Financial Consumer Agency of Canada’s website and input different, higher, interest rates and consider life events (job loss, family expansion, divorce, injury) that could impact your cash flow and ability to make payments.
- Your credit score matters. Get to know it, and change your debt behaviour to improve it.
- Budgeting is important, but a flexible budget is critical. Give your budget some fluidity so that if financial or life events happen (receiving an inheritance, paying off a debt, losing a job, expanding your family, etc.), you can adjust your worksheet and your frame of mind to new budgeting needs.
- Check out the Financial Consumer Agency of Canada’s (FCAC) website. Their mortgage stress test tool can help you understand how higher interest rates or changing costs of living can affect your ability to pay your mortgage.
Why your credit score matters
Let’s dive into one of these issues a little further. Your credit score is important, and the more you know about it the more likely you are to manage your debt behaviour, too.
As a general rule of thumb, you should never have more than 35 per cent of your existing credit in use at any time. Anything more than that signals higher financial risk to creditors, and it can affect your score, too.
Even one missed payment on a credit card or loan can bring your credit score down. If your credit score isn’t good enough (more than 700 usually), you’ll be deemed a risk. If you’re betting on a large loan, like a mortgage, or home improvement loan, you might be out of luck.
If your debt lags for too long — even if it’s a small amount — your credit score can also be impacted. It signals that you aren’t able to, or aren’t willing to, pay back your creditors in full, and it can make you seem like a bad borrower. Always aim to make more than minimum payments.
And remember, it doesn’t matter how much you make. Your credit score isn’t impacted by your income level, it’s impacted by how you use credit, and how you manage your debt.
Check out this blog on myths about credit scores at My Money Coach for even more insight into credit scores.
This year, make increasing your credit score part of your practical financial plan. As you pay down your debt, focus on your credit score growing. You’ll reap the benefits later.
To listen to practical advice from our Licensed Insolvency Trustees on how to change your debt mindset, click on the podcast link in this blog.