Credit and debt management: You need to do it now. Here’s how.

Credit and debt are the ‘yin and yang’ of borrowing. You need to have debt in order to establish credit, yet in order to continue borrowing, you need to maintain good credit by managing your debt.

While it may sound counterintuitive, the two are necessary for making any major purchases in your life (e.g. car, home, cottage, etc.). Although your goal should never be to carry unnecessary debt, learning how to get the balance right when it comes to credit and debt will set the course to financial stability throughout your life.

From your very first credit card and loan, to your cell phone and utility bills—your credit history is the culmination of your payment practices. Ensuring that history is a positive one all comes down to maintaining good habits. Just as a student’s hard work and studying is rewarded with good grades, credit bureaus reward regular bill payments with a good credit score… and that score affects your credit rating.

What’s the difference between credit score and credit rating?

Credit score: a mathematical formula consisting of 3 digits between 300 and 900 that credit bureaus use to grade your debt payment history.
(300-559 = poor; 569-659 = fair; 660-724 = good; 725-759 = very good; 760+ = excellent)
Credit rating: a single number between 0 and 9 that reflects the current payment status of each
of your credit accounts.
(0 = no activity; 1 = up to date; 2-5 = overdue; 6-7 = in collections; 9 = repossession/foreclosure)

According to the Financial Consumer Agency of Canada (FCAC), 86% of Canadians have a score above 650.

While a minimum score of only 600 is required by the Canada Mortgage and Housing Corporation (CMHC) to insure a mortgage with a down payment of less than 20%, your goal should be to always maintain a credit score on the higher end of ‘fair’ to ensure getting access to the best (lowest) interest rates.

1. Payment history. Always pay your bills on time. This means being consistent, as even a few late payments could negatively impact your score and overall credit history.

2. Credit utilization. Next to payment history, credit utilization is the second biggest factor that influences your credit score (making up 30% of your overall credit score). FCAC suggests keeping your credit usage to no more than 35% of your credit limit. If you have a credit card with a $3,500 limit for example, this means your carrying balance should be no more than $875. If you have multiple credit cards and loans, a general rule of thumb is not using more than 35% of the available credit limit for each. If you are continually coming close to maxing out your limit(s), it could raise red flags and lower your credit score.

3. Credit mix. Lenders typically want to see the right mix of credit accounts. For example, a combination of a car loan, credit card, and mortgage is considered a better mix than having 5 credit cards and a couple of unsecured loans.

4. Number of credit applications at one time. If you’re looking to apply for a credit card or any other type of loan, choose ONE to apply for at a time. Since credit scores are designed to gauge how big of a credit risk you are, applying for multiple credit accounts at once could indicate that you’re in financial trouble—which then lowers your score.

5. Collections/bankruptcy. If you have an account in collections or have had to file for bankruptcy, your credit score will take a hit. While rebuilding damaged credit isn’t easy, it’s not impossible. By dedicating yourself to making consistent, punctual payments, you can rebuild credit over time.

Tip: Do your research before signing up for a credit card. Avoid cards with high annual fees or interest rates and consider choosing cards that offer rewards in order to maximize your purchasing power—then use those points for the times of the year when you need it most, such as the summer months.

The simplest way to look into your credit standing is to access your credit report, which is a summary of your borrowing history. This report contains detailed information as to when accounts were opened in your name, how much is still owed, if payments are being made on time, and if you’ve ever gone over any of your credit limits. You can ask to see your credit report for free by contacting either of the two credit bureaus in Canada, TransUnion or Equifax.

Since this report can influence both your credit score and rating (which then impacts your overall borrowing power), you should get into the habit of checking your credit report once a year. This is especially important to do prior to applying for a mortgage. Checking into your credit report will ensure all the information contained within it is accurate and, most importantly, that you haven’t become the victim of fraud.

Did you know?
According to the Canadian Anti-Fraud Centre (CAFC), credit card fraud accounts for the highest incidence of financial scams by identity thieves.

That seems to be a challenge for the majority, according to a 2018 study from Statistics Canada. The latest numbers show that Canadian households currently owe an average of $1.71 for every $1.00 of income earned.

Where are education members on the ‘debt spectrum’?

According to the Educators Financial Kickstart Challenge, 54% of education members have debt (other than a mortgage) that they would like to get under control.

If you’re projecting to reach your 85 factor at age 58 (the average retirement age for education members), your goal should be to be debt-free by the time you start collecting your pension. If you’re not, you run the risk of still trying to pay down debt and all of the other day-to-day expenses you’ll have in retirement—all on your pension income. While it is a great benefit, it won’t be as much as what you were earning during your working years.

In order to get control of your debt, you need to fully understand the positives and the negatives to your credit options:

Debt Vehicle	Pros	Cons
Personal Loan	Set payment term Can be paid off anytime	Higher interest rate
Credit Card	Low minimum payment Revolving limit	Higher interest rate Can have debt for life
Line of Credit	Like a low-interest credit card Revolving limit Can be paid off anytime	No set payment term Can have debt for life
Mortgage	Set payment term Lowest borrowing rate	Pre-payment restrictions Not easily refinanced Long amortization

Being aware of the types of debt you take on (or currently have) will provide you with the capacity to develop a strategy to pay it all off.

If you’re looking to pay that debt off sooner rather than later:

Make more than the minimum monthly payment (whenever possible)
Pay off debt with the highest interest rate first
Consider lowering the limit on credit cards
Set spending limits or pay with cash
Get a consolidation loan

Of all the options above, loan consolidation offers you the following immediate benefits:

Simplifies your finances, as multiple loans/payments become one
Saves you money overall in interest payments
Provides the ability to repay your debt sooner
Provides the potential to improve your credit score (i.e. with only one loan payment to keep track of, you’ll be less likely to inadvertently miss/be late making a payment)

In summary, managing your credit and debt responsibly requires living by one simple philosophy: always live within your means.

From the smallest purchase up to something as big as a home—by making sure you can afford what you buy (even when you’re putting it on credit), you’ll be setting yourself up for financial success.

And always remember to do the following:

Make all bill payments on time
Keep track of your spending to avoid going over your limits
Keep your debt level below 35% of your limit
Create and stick to a plan to pay off debt
Check your credit report regularly to ensure that it’s accurate (and correct any mistakes)

From mortgages that offer cash back and competitive rates, to loans and lines of credit that enable you to consolidate multiple high-interest debts, Educators Financial Group offers the kind of borrowing options available only to education members (and their families). What sets us apart is our understanding of how your pay structure works during your working years and in retirement. This means we can ensure you’ve got the right borrowing options in place to meet your needs, then work with you to create a plan to ensure your finances are on track, through every raise up the pay grid—right up to the moment you start collecting your pension and beyond.

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The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.

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