I know my credit score is bad. I’ve nearly finished paying everything off, now what steps can I take

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Questions

Tags: Benefits Budgets Debt Financial Planning Investing Life Events Retirement Saving Taxes

I know my credit score is bad. I’ve nearly finished paying everything off, now what steps can I take to make it better?

Tagged: Debt

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In Canada, credit scores range from 300 (beginner) up to 900 points (the best score). A credit report contains information on all of your credit accounts submitted to the credit bureaus including balances, limits, and payment history. Credit scores are used by lenders, insurers, landlords, employers and utility companies to assess credit worthiness. The score ranks you as follows:

  • 750 and up: very good – you will get the best interest rates on loans
  • 710-750; good – you will qualify for competitive offers
  • 650-710: fair – approval likely but not at the best rates
  • 580-650; poor – qualify for credit at subpar rates and terms
  • 580 and below: very poor – frequent denial and high rates

Before taking steps to improve your credit score, it is important to know where you stand now. You can get free credit reports once per year from Equifax and TransUnion. To be free, the request must be made by mail, fax, telephone or in person.

To improve your credit score, you can implement the following steps:

1. Use a credit card

You don't have to carry a balance, but you do need to use it. Carrying a card with you that never gets used will not help your rating.

2. Pay all bills on time

A good record of on-time payments will help boost your credit score. If you have trouble paying in a particular month, it is better to contact the lender for alternate arrangements rather than risk being sent to collections.

3. Balance the limit

Balances above 50% of the credit limits will harm your credit. It is best to aim to keep your account balances below 75% of your available credit. Lenders like to see a big gap between what is being used versus what is available.

4. Keep old cards

Having a longer history on your accounts earns you more points, so avoid closing your accounts. A good credit history is built over time.

5. Fix errors

Frequently, inaccuracies on your report are a major cause of points lost. Errors include delinquent accounts listed that do not actually belong to you (either from identity theft or just by mistake) and late payments that were not really late. Simple things such as mistakes even in address, SIN and name spelling can also cause grief.It is critical that you pull your report as least once every year and contact the credit bureaus if errors need to be fixed.

6. Limit number of inquiries

Too many inquiries into your credit rating in a short period of time may indicate financial difficulties. If you are looking for a new mortgage or car loan, rather than applying in several places, you are better to print your own credit record and ask for pre-financing based on your provided report. That way, only the final company that you decide to work with will need to actually access your credit record.

Understanding your credit score, and taking steps to improve it, can help you put the past behind you and look forward to a better financial future.

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What is credit counselling?

Tagged: Debt Financial Planning

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Credit counselling is a service that helps you review your income, expenses, assets and debts (e.g., credit cards, student loans, and mortgages) with the intent of helping you solve your debt problems.  It can improve your finances without debt consolidation loans or consumer proposals. It also provides advice on money management.

If you are starting to notice that you are having trouble with money, the sooner you address the situation the better. You need to be honest with yourself about where you are financially in order to change.  Common signs that you may be having credit issues are:

  • Using credit cards to pay monthly expenses
  • Taking cash advances on credit cards to pay off another credit card
  • Borrowing money from family and friends
  • Worrying about how to pay the bills each month
  • Exceeding your credit card limit
  • Lying about the amount you spent to purchase an item

With credit counselling, it is possible to change your financial direction by developing strong money management skills..  You can get help reviewing your debt and how to pay it off a quickly as possible, how to develop a budget that works for you and allows you to pay off your debts, and how to save for the future and enjoy your journey today.

A budget should provide you with a breakdown of how much money you bring home each month, what your monthly expenses are, and how much is left over at the end of the month.  If you cannot balance your budget then you either need to increase your monthly income or decrease your expenses.

It’s important to understand the terms of all your debts.  In other words, what is the interest rate you are paying, how much are your monthly payments, how long will it take to repay the debt, and if there are any restrictions or hidden fees, such as charges for making early or additional payments.

Once you have your budget and debt repayment under control, part of credit counselling should include how to save for future goals such as an emergency fund, vacations, buying a home or new car.

There are various organizations that provide credit counselling services. Take a look online, ask your accountant, or check with the Better Business Bureau (BBB).  There are many Not-For-Profit organizations that offer credit counselling services.  It’s important to ensure that the organization is licensed in Ontario and that their advisors have appropriate qualifications.

You should be offered an initial free appointment by the organization to explain their services and the options that may be best for you.  Be sure to discuss the fees the organization charges and how they will be paid. You can also ask them how successful they are at educating clients to ensure you don’t get back into the same financial situation that brought you there in the first place.

Working with a qualified advisor will enable you to improve your situation and reach your goals for the future while enjoying the journey each day. - J.R.

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What is debt consolidation?

Tagged: Debt Financial Planning

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Debt consolidation takes all of your various debts, credit card balances and loans, and combines them into one loan with one monthly payment. The intention is to pay off your debt faster with lower interest rates. It’s also about maintaining a good credit rating; your credit score will decline if you miss payments.

Debt consolidation is a good option if you are trying to pay credit cards or other consumer debt with high interest rates and you have equity in your home. It doesn’t make sense to use a debt consolidation loan if you are trying to combine several small loans that already have low interest rates or if you have too much debt.

A debt consolidation loan requires that you are working and have a regular income.  You need to have your expenses under control and are manageable. The bank will review your expenses to ensure that you are within certain limits (e.g., housing costs are about 30% of your take home pay).  Your credit rating must also be at an acceptable level. 

If you have existing assets such as a home, you can use your assets to secure the loan and obtain a lower interest rate. If you don’t have any assets to use as collateral then it may be more difficult to obtain a debt consolidation loan, and if you are able to obtain one, the interest rate may not be as favorable. You may wish to consider having someone else co-sign the  loan or secure it with their assets.

There are times when debt consolidation is a good idea, and there are times when it is not in your best interest.

The advantages of debt consolidation are:

  • All your creditors are paid in full.
  • If you act quickly before missing further payments, you can maintain your credit rating.
  • You have only one monthly payment, which makes it easier to budget.
  • You will pay less interest, which will allow you to pay your debt off faster.

However, debt consolidation has some disadvantages you should consider:

  • You still have your credit cards, so need to control your spending.
  • The loan must be paid regularly, so you’ll need sufficient cash flow to make your payments.
  • If you have a co-signer and you can’t make payments, then the co-signer will be required to make the payments
  • If you have used your home as collateral and you can’t make the payments, it can put your home at risk.

If you don’t qualify for a debt consolidation loan, then a debt settlement or a consumer proposal may be an option.  While they result in a reduction of the amount of debt, they have serious consequences. Both will impact your credit rating for a period of 5 to 7 years. It’s important to get advice from a knowledgeable expert about whether or not these options that will meet your needs. 

I recommend reviewing What is credit counseling? for information about how you can manage your debt to avoid debt consolidation, debt settlement, or a consumer proposal.

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I recently received an inheritance.  Is it better for me in the long run to use it to pay down my mortgage, contribute it to a Tax Free Savings Account (TFSA) or put the money into my Group RSP?

Tagged: Debt Investing Life Events Saving Taxes

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An inheritance may be considered a gift from someone special in your life. And as such you may have an emotional connection to it that you should consider – do you want to use it as emotional investment or a practical one?

An emotional investment is using the inheritance in a way that reminds you of that person such as a special piece of jewelry or a cabin on the lake you used to spend time together on. The investment may contribute to your overall net worth while achieving the emotional connection you are looking for.

Or you may choose to use this inheritance on something more practical, such as an investment. How do you choose what to do?  First, evaluate your current financial position. Take a look at what you owe, your investments, and your monthly cash flow. Could you use your inheritance in any of these areas? 

You may be close to retirement and need to reduce your debt so that you’ll be debt free when you retire so that you can use your cash for a better retirement lifestyle. Or, you may have a large mortgage and are struggling to make ends meet. In these cases, consider using the money to pay down your mortgage.  The interest costs on your mortgage may be higher than any income you could get investing the money. Check with your lender about penalties for pre-payments on your mortgage. Consider investing the monthly savings from a reduced mortgage payment into an RRSP or TFSA.

When investing a lump sum amount into your RRSP, the factors you need to consider are:  your current taxable income level, your RRSP limit, and the total amount you wish to put into the RRSP. RRSPs allow you to defer paying income tax until you take the funds out at a later date – preferably when your income is at a lower taxable level. You could put your inheritance into an RRSP and then take the tax savings from this and put against your mortgage allowing you to achieve two objectives – increasing your retirement fund and paying down your mortgage.

When investing in a TFSA, the objective is to earn money that is sheltered from taxes. Unlike an RRSP there is no tax deferral benefit. But putting your inheritance into a savings account earning .5% interest doesn’t achieve much.  Consider working with a qualified investment advisor to ensure you are getting the best return on your investment while considering your risk tolerance.    

If you are in a committed relationship one important consideration is that if you use your inheritance to pay down your mortgage or contribute to a joint asset, then the funds become part of the “family assets”.  To protect these funds in the event of a relationship split, you may want to keep them in a separate investment in your name only. It is important in this case to get legal advice.

There are many variables to consider when it comes to an inheritance, so working with a qualified accountant and financial advisor will help you analyze your situation and options. -JR

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