Excellent advice from our friends at Home Trust
Every November, a spotlight is shone on financial literacy in Canada, encouraging consumers to take charge of their finances. Financial Literacy Month is an ideal time for people to consider their financial health and educate themselves about such topics as creating a budget, borrowing responsibly and avoiding overextending their credit.
Begin with budgeting
The Financial Consumer Agency of Canada recommends that everyone start with a budget, which is a plan that keeps you on track in terms of how much you’re spending versus how much you’re earning. A budget is key to making sure you don’t overspend and gives you a roadmap for developing a savings plan. It’s especially important for people who have trouble paying off debts, who want to plan for big purchases such as a car or house, or those needing to save for retirement.
Before you develop a budget, it’s a good idea to first track your expenses for a couple of months to see where your money is going. Separate these expenditures into items that you need, such as groceries, mortgage payments or rent, and items you want, such as dinner out or a new pair of shoes.
Once you have an idea of what you’re spending, see if you’re covering your expenses and have something left over. Budget calculators are handy tools to help track spending. If more money is going out than coming in, you need to look where you can cut expenses and/or increase your income, otherwise, you’ll be well on your way to accumulating debt.
Have a plan to pay down debt
Despite best intentions, Canadians spend more than they earn. Household debt levels are up and the debt-to-disposable-income ratio is on the rise, according to Statistics Canada. The average Canadian owes nearly $1.79 for every $1 of household disposable income.
High debt has many side effects. One of them is stress. According to a survey by the Canadian Payroll Association, 40 percent of respondents said they felt “overwhelmed” by the amount of money they owe. Financial stress can also lead to serious health issues, such as heart disease and high blood pressure, as well as anxiety and depression.
Having a plan to pay down debt is important. Once you have a list of all your debts, how much your payments are and interest rates on each, decide on how you will pay them down. Look at your budget and see what time frame is possible and decide what debts to pay off first. Some people choose to start with the highest interest debt first. Others might choose to start with the smallest debt, to establish a sense of accomplishment and motivate them to tackle the rest.
It’s also important to talk to your creditors to discuss your financial situation. You might be able to get lower interest rates, extend your repayment terms so that your monthly payments are smaller or consolidate your debts, which lets you pay off more, high-interest debts with one regular payment at a better rate.
Understanding credit scores
The amount of debt people have and how well they manage it directly impacts their credit rating and ability to borrow at good rates. Creditworthiness is what traditional financial institutions weigh when considering a mortgage or loan application. One of the first things they do is look at credit scores and credit history. The better these two are, the lower your interest on any debt you do incur will be, and the sooner you can pay off your debt.
Your credit score is a number that ranges from 300 up to 900 and it is based on such criteria as:
- Payment history (Do you pay on time? Are you periodically or always late?)
- Credit utilization ratio (This refers to how much of your available credit you are using, and experts recommend less than 30 percent)
- Length and history of accounts (Do you have a variety of credit accounts?)
Over time, you want to build and maintain a good credit score. Some tips to get that score up include paying bills on time, paying more than the minimum amount, getting your balance down and having a variety of credit. You can learn more about rebuilding your credit history here.
If you have no credit history at all, or have weaker credit, you can opt for a secured credit card, which is a credit card that’s backed with a cash deposit as security. Using it can help raise that credit score.
Commit to financial fitness
Financial health affects all aspects of life, so it’s important that you’re able to manage your money instead of it managing you. The federal government has many educational tools and information sheets to help you improve your financial literacy.
Whatever your personal situation is, there is likely help to be found. For instance, while lenders use credit scores to assess your creditworthiness, that score is just a guide so it’s important to investigate solutions for your unique debt or credit concerns.