As I’ve often said, managing money isn’t rocket science. And it isn’t magic. It’s discipline. You must decide that you will live on what you make. You have to be determined to do whatever it takes to get your consumer debt—your credit cards and your lines of credit—paid off in three years or less. And you must be committed to putting some money away for the future.
Wouldn’t it be nice to go to bed at night and not be awoken by the spectre of debt, rattling its chains and threatening your family’s safety and security? Wouldn’t it be great to buy something new and fresh and fun with the full confidence that you can pay the bill when it arrives? And wouldn’t it be lovely to know, that having hit a wall, you have the financial resources to cope?
You can have everything you want. All you need is a plan. And how do we spell plan? B-U-D-G-E-T!
MAKE CREDIT WORK FOR YOU
While my main mantra is Debt-Free Forever, and you’ve been busting your butt to get there, that doesn’t mean credit is an evil thing that must be avoided at all costs. You can use credit to make things work for you. What you must avoid is turning that potentially useful credit into a yoke of bad debt that stifles your budget and cramps your style. As long as you understand how credit works, and the role it can play in bringing your goals to fruition, you can use credit to your advantage.
A Word About Your Credit Score
Credit score! Credit score! CREDIT SCORE! Everyone is so obsessed with having the highest possible credit score. The reason: your credit score not only affects your ability to get credit, it affects the interest rate you will pay if you do. The better your score, the lower your risk to a lender (or the more profitable you are), and the lower the interest rate you’ll have to pay.
Knowing your credit score is important when you’re trying to borrow money and when you’re trying to negotiate a better interest rate on your debt. Not knowing your credit score means you’re ignorant about something that can have a huge impact on your financial life.
Your credit score is a number that is calculated based on a bunch of factors lenders use to decide whether to lend to you. The FICO score is a credit score developed by Fair Isaac & Co., which began its pioneering work with credit scoring in the late 1950s. The point of the score is to consolidate a borrower’s credit history into a single number. While Fair Isaac & Co. and the credit bureaus do not reveal how these scores are computed, there are a number of factors that affect the score you receive.
The “Credit Scoring System” is a numbers game: the more “points” you score, the better you do. People are sometimes surprised at what will negatively affect their scores.
While you may be tempted to lie about your age especially if your boy-toy is looking over your shoulder, don’t. If a creditor catches you in a lie, they aren’t going to trust the rest of the information you provide either, and you won’t get the loan. Of course, vanity isn’t the only reason people lie about their age. If you’re under 21, you might be tempted to lie because you’re afraid they won’t like your tender age. And you’d be right. Under-21s score zero points. Between the ages of 24 to 64 years, give yourself a point. You’re probably working. Over 65? Zero points … you’re old!
GAIL’S TIPS
Whenever you use all the credit you’ve been given on a credit card, the credit scoring agencies shake their heads and say, “Tut-tut” and then adjust your credit score down. And the closer you get to your limit, the more they shake and tut and subtract from your score. When that happens, lenders respond by jacking up your interest rate. Type up the following and stick it to the back of your card: Danger: Your credit limit is $ (half of what your statement says it is) and you have $ (how much) room left!
Creditors think people who are unmarried are a higher risk. If you are married, give yourself one point. Now you’d think that being divorced might work against you (all that spousal and child support), but most creditors don’t give a whit.
No dependents? Score zero. You’re probably still drinking your money away like a teenager since you haven’t yet “settled down.” And with no “ties that bind” you could skip town at a moment’s notice; not good for collections. One to three dependents? Score one point. You’re a solid citizen. More than three dependents? Score zero. Have you no self-control? And don’t you know you that with all those mouths to feed you could get in debt over your head?
GAIL’S TIPS
You don’t automatically assume your partner’s level of indebtedness when you choose to tie the knot. The only way to be on the hook for your partner’s debt is to actually sign up for it. if you don’t co-sign, co-borrow, or in some way put your John Hancock on the paperwork, nobody can collect the debt from you. However, if you have joint assets, his or her share of the assets could be affected when the bill collectors want their money back. They can force the sale of joint assets to get their piece of the pie. So the trick would be to not own anything jointly. And your pal’s crappy credit history could come into play when it comes time to start fulfilling some of your dreams. A lousy history with money may mean you won’t qualify jointly for a mortgage, or you’ll have to pay through the nose.
Home address? Live in a trailer park or with your parents? Oops. Bad risk. Score zero points. You’re showing no stability and could skip town with nary a look over your shoulder. Rent an apartment? Give yourself one point. Own a home with a big, fat mortgage? Good for you. Score three points. Someone has already done some checking and you qualified for a mortgage, so you can’t be all bad. Own your home free and clear? Even better. Take four points. You’ve proven you can pay off a sizable debt and now you have a pile of equity that the card company would love to help you spend.
Previous residence? Zero to five years (some applications only go to two years), score zero points. You move around too much! Over five years? You’re stable, so score one point.
Years on job? The longer, the better. If you have less than one year at your present employer, you’ll earn no points at all, which explains all the whining from the newly working who can’t get approved for a credit card. One to three years on the job will earn you one point. Four to six years is worth two. Over seven years at the same company and you’re probably bored out of your mind but you’ll score three points.
Most creditors belong to at least one reporting agency and share their information liberally with one another. Of course they’re more likely to believe their own information than somebody else’s. So if you paid off a loan with them, give yourself five points. Good record with other creditors should earn you two or three points.
It’s pretty obvious, but the more you make, the better. Having a savings and/or chequing account with a balance over $500 will earn you a couple of points, providing you didn’t open up the account last week.
Having a landline in your own name earns you a couple of points because creditors have a way to contact you if you fall behind in payments. Since they can’t use your cell phone to actually locate you physically, it doesn’t count.
GAIL’S TIPS
I don’t have the best credit score going. Does that surprise you? The main reason is that i’m determined to pay off my credit cards in full every month so i incur no interest. Not very profitable, am i? And that’s why my score is lower. if i made my minimum payment every month, my score would be higher.
I’m not obsessed with my credit score, and neither should you be. Your credit score is only important if you’re borrowing money. Once you become debt-free, once you eliminate your dependence on other people’s money to live your life, your credit score has much less impact on your financial life.
Focusing on your credit score is a trick, a distraction from the real issue: You have to learn to live within your means. Credit cards and lines of credit only serve you when you have the power. Give the power to the creditor and you’re a puppet, jumping and twitching. So, do you want to be some credit card company’s puppet? Like the feeling of twitching when collectors call? No? Okay then, it’s time to retake control an
d be in charge.
Being in charge means being out of debt. It means paying off your balance in full every single month. It means having only as much credit available as suits your needs. Do you want to be some company’s dream customer, paying gobs of interest and twisting in the wind when the company decides to change the rules of the game? Or do you want to be in charge of your money and your life?
All you have to do is accept that living on credit is dumb. Dumb! Dumb! Dumb! The only way to be financially safe is to owe nobody nuthin’.
Living within your means isn’t as hard as some people think. Yes, it does mean you have to make choices. And yes, you may have to wait a while before you can take that vacation. But when you start living within your means, you’ll be in charge.
Don’t Pay for “Credit Repair”
When a company offers to fix your sloppy credit history, it’s often just a ploy to get your money. And wouldn’t you rather spend that money—anywhere from $250 to $1,000—paying down debt, saving for your kids’ education, or building up an emergency fund, especially when it’s virtually impossible to cover up your past mistakes? While ads for credit repair companies may seem like the cure for a credit life lived less than perfectly, in reality, no credit repair company has the power to change or erase accurate information in your file.
If the reason you’re in trouble with a potential lender is because of wrong information on your credit file, you could pay someone to take care of the problem for you, but it’s often just as easy—and a whole lot less expensive—to take care of that problem yourself.
GAIL’S TIPS
When you sign a loan application, you give your consent to the lender, be it a bank, credit card company, or retail store, to access your credit bureau information to decide whether you’re a good credit risk. Each time a lender looks at your file, there’s a record of that “look” on your file. And too many “looks” could mean you’re as bad credit risk because either you’re “credit seeking” or you’ve been declined elsewhere. So if you’re shopping around, don’t sign an application unless you’re ready to buy.
If you’ve damaged your credit rating by missing payments, carrying high balances, or overextending yourself financially, start fixing the problem by locking away your credit cards. Don’t cancel them because if your credit rating is low, you could have trouble getting new ones. But don’t use them until you are debt-free. While you must pay at least the minimum to stay on the positive side with your credit history, paying only the minimum isn’t going to get you out of debt. So figure out what it’ll take and do it!
If you are declined for a loan, it doesn’t automatically mean you have a crappy credit history. A lender may decline a loan application because the credit bureau’s records indicate that you have other loans outstanding. Yes, everything you owe shows up—including all those credit cards you have even if there are no balances outstanding. When credit is refused, you’re usually advised to have a look at your credit bureau report to see what’s amiss.
You should check your credit files at least once a year to ensure the information is correct. Send a written request (there’s no charge for this service) or go online if you’re into instant gratification, but you’ll have to pay a fee.
If you question an item on the file, the credit bureau will investigate on your behalf to verify the status of the entry. If an error is found, the credit bureau will fix it and send copies of the updated file to credit grantors upon request.
The longer you exhibit good credit behaviour by paying your bills on time and managing your credit wisely, the more your credit rating will improve, until you once again achieve a favourable credit rating. And if you’ve got a good rating that’s been marred by inaccurate reporting, it’s your job to fix it. It’s your credit, after all.
Credit Cards Aren’t Evil
While I hate debt and I think carrying a load of it around is like walking around with a sack of poop over your shoulders, I have nothing against credit cards. Credit cards aren’t evil. In fact, I love my credit card for a whole bunch of reasons:
1. Since I pay off my credit card religiously, and I have a no-fee card, there is no cost to using my card no matter how many transactions I do.
2. Using a credit card for all my transactions saves me having to walk around with gobs of cash. Lose a card and it can be replaced at no cost. Lose cash and you’re very sad.
3. My credit card statements show a clear picture of what has gone where so I can look back and do an analysis of my spending.
4. Every penny I spend on my credit card earns me points that I routinely convert into groceries or other items (like my new barbeque), saving me a not insignificant amount of money.
5. My credit card also offers purchase protection, so if the item I buy is lost or stolen within a specific period—usually 90 days—the card will replace the item. This came in mighty handy one year when I lost my cell phone while I was on a book tour. Others offer travel insurance of all kinds that can save you big bucks on everything from travel medical coverage, to collision coverage on a rental car, to trip interruption or cancellation coverage. And then there are all the free flights you can accumulate just by signing up for the right card.
GAIL’S TIPS
Here’s a way to get more warranty without shelling out for an extended service contract. Since some credit cards offer to extend most manufacturers’ warranties for a full year, just by paying for your new purchase with one of these cards, you get an extra year of coverage. You have to be vigilant about keeping all the paperwork so you can collect. You’ll likely need the store receipt, the credit card statement showing the purchase, the manufacturer’s warranty and the repair quote. Check your credit card agreement to see if your credit card offers extended warranty coverage, or Google your card and look at the benefits.
6. Travelling with a credit card beats the bejesus out of pulling money out of foreign ATMs and racking up huge fees. I travel with a couple of hundred in cash and then use my credit card for absolutely everything I can.
7. Using a credit card and paying it off in full every month is one of the best ways to build a great credit rating.
Credit cards aren’t for everyone. According to the Stats Man, the country’s outstanding credit card balance has more than tripled, to almost $40 billion, in the last 10 years. So while credit cards can be a terrific tool for the people who have the discipline to use them to advantage, there are a lot of folks out there who have fallen into debt traps using credit cards.
GAIL’S TIPS
The best way to use a credit card without falling into a debt trap is to only spend money on the card that you know you can pay off when the bill comes in. That means keeping track of how much you’re spending every time you whip out the card. Keep a notebook with a running balance of what’s in your bank account. Each time you use your credit card, deduct the amount you have spent—as if you’d done a debit—from your notebook. Then, when the bill comes in, you’ll have all the transactions already debited from your balance, so the money’s there to pay off the bill.
DEBT-FREE FOREVER
For a long time Canadians have been racking up debt at a wicked clip. Spurred on by easy access to credit and a desire to at least appear successful, people have spent thousands of dollars they have yet to earn. If you’re reading this book, you are likely one of these people.
But there is a new movement afoot, a movement to get out of debt and stay out of debt. If you are determined to be part of the Debt-Free Forever success story, you need only make that goal a priority and then take action. Whenever you need a reminder of the path to follow, come back to this book and these eight steps for a refresher.
STEP 1: TAKE STOCK OF YOUR DEBT SITUATION
This may take an hour or 12, but having a written plan means you are way more likely to get to where you want to be. Use what you learned in Chapter 2 to figure out where you are.
STEP 2: STOP USING YOUR CREDIT
If you pay $100 off you
r line of credit and then go out and spend $75 on another credit card, you’re playing a game you will eventually lose. Put away all the credit. It’s time to start living on what you make.
STEP 3: PRIORITIZE YOUR DEBT AND CALCULATE YOUR PAYMENTS
In Chapter 5 you learned to list what you owe by interest rate with the most expensive (the highest rate) at the top of the list. And you learned to calculate the minimum payment on each debt—what you have to pay to keep current and not bruise your credit history. Then you figured out how much to repay to get out of the hole. Now it comes time to put your money where your mouth is.
You already know it’s going to cost you $300 a month in minimum payments to keep your credit history in tact. But if you want to get that credit card paid off in six months, you’re going to have to slap much more against that sucker to make it go away. It is at this point that you prove how serious you are about becoming debt-free.
STEP 4: DON’T FALL INTO THE TRAP OF IGNORING GOOD DEBT
Some people seem to think that because some debt is “good” debt, it’s okay to keep it hanging around forever. Which brings us to your student loan, if you have one. Decide you want to be done with that debt in five years or less and decide where you’re going to get the money: if you want to be debt-free, you have to find the money to pay off the debt. It may mean going over your budget with a paring knife. It may mean finding a way to make more money. You’ll do whatever it takes.
Debt-Free Forever Page 21
