Managing Debt and Credit

Managing Debt and Credit
Avoiding credit card overload increases your opportunities to save and invest for important goals.
Before You Start
Gather recent account statements from your credit cards and other debts.
Review the interest rates and finance charges you currently pay on each account.
Take a fresh look at your household budget (or spending habits if you don't have a budget yet).
Think about your ability to stop using credit on a regular basis and what changes you might be willing to make to improve your financial outlook.
How-To Guides
Your Retirement Checklist
Using Credit Wisely
Buying Your First Home
Financing a New Car
View more how-to guides
Calculators
Comprehensive mortgage calculator
How much am I spending?
How will payroll adjustments affect my take-home pay?
How much will college cost?
How much will I need to save for retirement?
View more calculators
Topics
Managing Debt and Credit
Installment Debt
Revolving Credit
Using Credit Wisely
Eliminating Credit Card Debt
The Role of Debt
1
Managing Debt and Credit
Credit was once defined as "Man's Confidence in Man." But in fact, the definition of credit today is more like "Man's Confidence in Himself." Using credit today means you have confidence in your future ability to pay that debt. Forty years ago, your parents may have paid cash for their homes and their cars, a largely unheard-of event today. If they borrowed money at all, chances are it was from a relative or friend, and not a financial institution.
Today debt and instant credit are part of our everyday lives. The convenience of instant credit, however, has taken its toll. Many individuals use credit cards to spend more than they earn, and a few of these people actually build themselves a debt prison from which some never emerge. On the other hand, those who never use credit can be denied a loan or credit when they have a justifiable need or use for it. Using credit establishes a history of financial responsibility: Until you establish a credit history, your chances of qualifying for an important loan, such as a mortgage, are greatly reduced.
What is the balance between using credit wisely and staying out of overwhelming debt? Let's look at the facts and some pros and cons. Back to top
2
Installment Debt
Debt comes in many forms, and most types help us in our daily lives -- when used responsibly. Most people cannot buy a home without some financial help, and many cannot buy a car (especially a new one) without some sort of financing. The money borrowed to purchase large-ticket items is called installment debt: The debtor pays a portion of the total at regular intervals over a specified period of time. At the end of that time period, the loan with interest is paid off.
Installment debt allows you to purchase items at a competitive interest rate: for example, 5% to 7% for a 30-year home mortgage and 8% or 9% for a car loan. The loan is paid back on an amortizing schedule, monthly payments of a fixed amount that remain constant over the life of the loan. At first, most of the monthly payment consists of interest. In later years, principal begins to be paid down.
Installment debt is easily budgeted and the debt is eliminated on a predetermined date. Even for those who may actually have the cash to purchase the desired item, installment debt can make financial sense if you can earn a higher return (after taxes) on your investment of cash than you must pay on your installment debt. Back to top
3
Revolving Credit
A revolving line of credit, also called "open-ended credit," is made available to you for use at any time. Examples of revolving credit are credit cards such as Visa, Mastercard, and department store cards. When you apply for one of these cards, you receive a credit limit based on your credit payment history and income. When you use the credit line, you must make monthly minimum payments based on the total balance outstanding that month. Some lines of credit will also have an annual account fee.
While revolving credit is a convenient way to borrow, it can also become an endless pit of minimum payments that barely cover the interest due. Many cards charge annual rates of interest of 18% or higher. As you pay off your debt, the minimum payment is also reduced, thus extending your payoff period and, consequently, the interest you pay. Paying just the minimum due on a $2,000 credit card loan could mean making monthly interest payments for 10 or more years!
Revolving credit, in addition to being convenient, eliminates the need to carry a lot of cash and can help establish you as a creditworthy risk for future loans. The itemized monthly statements also can help you track your expenses. But some people can easily yield to the temptation that the convenience of credit cards offers. Impulse buying, failing to compare costs, and purchasing large items you can't afford are all downfalls brought on by always available purchasing power. Spending more than you earn in any given period is a dangerous practice at best, but doing it over an extended period of time can be financial suicide.
Installment Debt vs. Revolving Debt
Lower interest rates and an amortizing repayment schedule can make installment debt a much cheaper alternative to revolving credit.
Installment
Revolving
Beginning Balance
$2,500
$2,500
Interest Rate
10%
18.5%
Years to Repay
4
30*
Interest Cost
$544
$6,500
*Paying 2% minimum monthly payment.
Sources and Costs of Debt
Source
Type of Debt
Cost
Banks and Credit Unions
Personal, secured
Low
Personal, unsecured
Moderate
Mortgage
Low
Credit Card
Low to High
Mortgage Companies
Mortgage
Low
Department Stores
Revolving
High
Insurance Companies
Personal, unsecured
HighBack to top
4
Using Credit Wisely
To use credit intelligently, start by examining the terms of the card(s) you are currently using. Keeping track of your cards, their rates, and your current balances will help you to be aware of how you use credit cards. Increased competition in recent years has led some credit card companies to offer enticing features to attract new cardholders, including no annual fees and low interest rates for an introductory period. (And credit card companies sometimes will give their introductory rates to existing cardholders so that they won't transfer their balances to another credit card company.)Back to top
5
Eliminating Credit Card Debt
If you think you may have too much credit card debt, begin to address it by honestly evaluating your spending habits. Examine your existing expenses to analyze how your money is spent. You will most likely be able to identify the problem areas where you are more likely to spend too much or too readily with credit cards. Then, based on your current spending practices, create a realistic budget to pay off your credit card debt in the shortest time possible while not adding any more debt to it. For assistance, you may want to turn to your financial advisor, who can help you to allocate your resources wisely to address your credit card debt.Back to top
6
The Role of Debt
Today, carrying installment debt is almost a fact of life. Mortgages, car loans, or small-business loans (to name a few) are part of almost everyone's life. On the other hand, carrying credit card debt is usually not a good idea. At interest rates of 16% and up, it's hard to justify keeping savings that could pay off that 18% department-store credit card in the bank at 2%.
Debt and credit play increasingly important roles in our lives. As the aging Baby Boomers get closer to their peak earning years, many are realizing the need to reduce debt and increase savings. Even though analyzing your spending habits and creating a budget to address your debt may seem a little overwhelming, the simplicity of the philosophy of the Depression era still stands: Never spend more than you earn. Once you have come to grips with this basic fact, managing your debt will become far easier and more rewarding. Back to top
Summary
Installment debt means the loan is paid off in a specified period of time by making predetermined payments periodically.
Revolving credit is a line of credit that is instantly available through use of a credit card (and sometimes a check).
As you pay down your debt in a revolving line of credit, the minimum payment is also reduced, thus extending your payoff period and, consequently, the interest you pay.
Spending more than you earn in any given period is a dangerous practice at best, but doing it over an extended period of time can be financial suicide.
Checklist
Remove high-interest-rate credit cards from your wallet or purse to reduce the temptation to use them unnecessarily.
Read the fine print on all account statements to understand how your fees and payment amounts are calculated.
Prepare to transfer balances from accounts with temporary low interest rates that are scheduled to rise soon.
Use the savings from your debt reduction initiatives to set more money aside for important short- and long-term financial goals.

Options In Canada For Debt Relief

PLEASE CONTACT US TO GO OVER YOUR OPTIONS

Canada’s Office of Consumer Affairs (OCA)
Options – Ontario

Budget counselling is an option that enables you to take control of your
finances
with the help of a budget counsellor. This service helps you determine why
you
are in debt and find ways to deal with the problem. href="ca02154e.html">To learn more…-->
Consumer ProposalA consumer proposal is an offer made by a debtor (through a trustee in bankruptcy or a person appointed by the Office of the Superintendent of Bankruptcy to administer consumer proposals) to his or her creditors to modify his or her payments. To learn more about consumer proposals visit the Office of the Superintendent of Bankruptcy website.
BankruptcyBankruptcy is a legal process performed under the Bankruptcy and Insolvency Act. Because of your inability to pay your debts, you assign all of your assets, except those exempt by provincial law, to a licensed trustee in bankruptcy. This process relieves you of most debts, and legal proceedings against you by creditors should stop. To learn more about bankruptcy visit the Office of the Superintendent of Bankruptcy website.
Do you have a student loan debt or a tax debt?

Take Inventory To Improve Credit Heath

Take inventory to improve credit health

Here's a suggestion for something to do in March, as we wait out the end of another long Canadian winter: take a credit inventory. Just as you would with any other part of your personal finances, you want to examine how you've been spending your money and look for ways to do it more effectively.
Start by taking a good look at the numbers: your credit score, where you've been, where you want to go. Has your credit score gone up or down over the past year? Are you planning a major purchase in 2008, like a car or a house, where you'll need to convince lenders your credit is absolutely the best it can be? Does your creditworthiness allow you to negotiate for the best rates and terms available? The year may no longer be new, but you can still set some goals for yourself financially.
Take a look at your credit profile to determine spending patterns and see where you can improve or save yourself money. Interest charges on unpaid balances are often an area where people can improve. For example, if you have a $5000 balance on a card with an interest rate of 17%, you're going to pay $850 in interest charges.
If you can't pay off your balance immediately, negotiate with the credit card company to lower your rate. Often they will lower it rather than lose a customer (if your credit is good). If the credit card company refuses to lower your interest rate, consider transferring the balance to a card with a lower or zero interest rate on balance transfers. You might've been receiving such offers in the mail all along. (Just be careful not to add to that balance with new charges as you pay it off.)
A useful option for paying down credit card balances is to set up an automatic payment plan with the credit card company. With automated payments, you don't have to remember to pay every month (and you'll never have to worry about late fees or penalties).
If you're worried about purchasing too much on credit, or just want to see where your money's been going, your credit card statements, if you've saved them, can provide an invaluable snapshot of how you've been spending your money over the past months. (And if you haven't saved paper copies, most credit card companies will allow you to access online statements.) Take a look at all your monthly statements over the year to determine where your money really goes. If you're planning to make a budget, credit card statements can show you expenses you might need to budget for that you weren't considering -- or show you areas where you can cut back.
Finally, you probably already know that it's critical to check your credit regularly to make sure there are no inaccuracies or instances of identity theft or fraud. Now is a good time, if you haven't been doing this regularly, to start. And if you find inaccuracies, you'll need to dispute them.

Consolidation of Debt a True Way To Save $$$

With debt, all your eggs do belong in one basket

See video and research report (below)Consolidation may be a tried and true method of reducing interest costs but how many of your clients are actually doing it? And have you encouraged them to consolidate not only their debts but their short-term assets as well?Survey says . . .A survey recently conducted by Maritz Research* on behalf of Manulife Bank found that 55% of Canadian homeowners polled currently have some sort of household debt but that only 33% of those have ever tried consolidating it. Nearly 40% of these survey respondents said they had not consolidated their debt because they believed there is no advantage to debt consolidation but a new study by Professor Moshe Milevsky, an Associate Professor of Finance at the Schulich School of Business, York University and Executive Director of the Individual Finance and Insurance Decisions (IFID) Centre clearly indicates otherwise."While portfolio diversification is an excellent principle when it comes to your assets, it's not a sound practice when applied to your debts," says Milevsky. In fact, he points out that diversifying debt is actually harmful to Canadians because it costs them money each year.Recent study confirms itIn the recent study on Canadians' debt habits, Milevsky found that the average Canadian homeowner can realize annual savings by simply consolidating all of their debts with their savingsin one line of credit, at one low interest rate. The study emphasizes that, while consolidating debts is advantageous, even more savings are realized by using one's short-term savings to pay down the debt immediately. And a line of credit is ideal because the homeowner can take the money back out again to pay for monthly expenses and other costs as they arise.Together, we can help clients consolidate and saveOf course, Manulife One is the ideal product to help your clients consolidate and save and still have access to their money. However, changing life-long banking habits -- such as diversifying debt -- takes more than just a great product. It takes proper education and help from someone they trust.We've created a short video that explains the findings of the study and produced a summary of the report to help make it easier for you to explain the benefits of debt and short-term asset consolidation to your clients. Take a look at the items here and then contact your local Banking Consultant for support in referring your clients to Manulife One. It is important that you refer Manulife One only to your existing clients.
Professor Milevsky explains (1 1/2 minute video)
Summary of report (22 KB)
Full research report (105 KB)
Press release (25 KB)Go to manulifeone.ca for details about Manulife One and to try the online calculator.*The survey by Maritz Research conducted between September 15 – 21, 2005 of Canadian homeowners has a margin of error of +/-2.73 per cent, 19 times out of 20. The number of Canadian homeowners surveyed was 1,261.

Setting a Budget After Debt Solution

If you're the type of person who always has plenty of cash, knows exactly where every penny goes, and never has trouble paying bills, skip this chapter. You're either too rich or too smart to need it.
For the rest of us, unfortunately, making - and sticking to - a budget is the essential tool for ensuring that our money gets used the way we need it to. Even if you're in the happy situation of having plenty of income, the homework involved in drawing up a budget can be instructive, since you may find that you are spending more than you wish on items like DVDs, electronic gadgetry, or restaurant meals.
Drawing up a budget is usually pure drudgery enlivened only by the reality of staring your foolish spending habits in the face. In fact, one of the chief impediments to budgeting is that most people would rather not know how they really use their money.
It's bad enough to learn this kind of information on your own. It's even worse when a spouse or significant other finds out, since it usually confirms his or her worst fears - and provides new ammunition for future "discussions."
Take heart. Any spending mistakes you're making are probably common and not impossible to kick. Moreover, the bulk of budgeting's pains are at the beginning.
After you have a budget in place - and you've fine-tuned it with a couple of months of actual spending - tracking your expenditures becomes almost automatic.
If your boss at work were to ask you for an analysis of the department's spending, you'd figure it out quickly enough. Budgeting your household should be approached in the same businesslike fashion. A variety of electronic tools can make the process easier.