credit score

Canadians Live Beyond Their Means

A survey conducted by the Canadian Payroll Association reveals that around 48 percent of Canadians live paycheck to paycheck. This is a troubling fact which shows that many people are financially vulnerable. Cheap credit partly explains why half of the respondents do not have an emergency fund for a rainy day. Yet, the fact that many Canadians spend their entire earnings and borrow on top means that they live beyond their means. A recent survey by the Canadian Imperial Bank of Commerce confirms this. The survey shows that 50 percent of respondents are unwilling to downgrade and trim unnecessary and non-essential spending. This is a worrisome finding in light of the fact that essential expenses such as rent and groceries already eat up a large percentage of households’ disposable income.

People who live paycheck to paycheck often carry a balance and only pay the minimum. Many have multiple credit cards and other debt such as personal loans and mortgages. They never set a monthly budget and short – and long – term financial goals. The problem with living large is that many people are unable to save at least 5 percent of their disposable income. This puts them in a vulnerable position when faced with a major crisis such as loss of income or employment, divorce, or prolonged illness. Then many are forced to resort to high-interest rate loans to pay bills and make ends meet.

Using Payday Loans

A survey by the Financial Consumer Agency shows that 4.3 percent of Canadians resorted to payday loans in 2014, up from 1.9 percent in 2009. The majority of respondents or 45 percent borrowed to pay emergency expenses such as car or household repairs while 41 percent used the money to pay expenses such as electricity, water, and heating bills. And while 70 percent of respondents used their paycheck to pay off the balance, 7 percent of people admit that they took a new loan. Others used their credit card, sold something of value, used an overdraft, or borrowed from family or friends. One of the main problems is that many people are not aware of the fact that payday loans come with very high interest rates. Some 43 percent of respondents admitted that they were not aware of this. The majority of respondents or 88 percent reported that they were unable to access a line of credit. Poor credit rating and history are major obstacles for many borrowers who are forced to resort to costly alternatives.

Accumulating Too Much Credit Card Debt

According to an Ipsos poll, Canadians owe over $8,530 in consumer debt on average, and 14 percent of respondents carry balances between $10,000 and $24,999. It is obvious that Canadians tend to accumulate excessive card debt, and data by Bankruptcy Canada confirms this. Some 75 percent of people carry a balance on a monthly basis while 25 percent pay it in full. The problem with credit cards is that many opt for products with high interest rates just to take advantage of complimentary bonuses, discounts, and rewards points. Many are also tempted to make card purchases just to collect points.

Credit History Problems

A good score is one in the range of 660 – 700 but data by Refresh Financial reveals that some 20 percent of Canadians have scores that are below 600. Data by Equifax Canada shows that close to 3 percent of borrowers have a very low score below 520, which puts them in a high-risk category. At the same time, this is not surprising given that 65 percent of Canadians check their score once a year or have never bothered to check it. What is more, people of working age hold 2.2 credit cards on average. Card debt also makes for about 5 percent of the total debt carried in Canada. The problem is that it accounts for 15 percent of all monthly payments and increases to 88 percent if borrowers were to pay off the balance in full.

Poor credit rating is a serious problem for many Canadians because it leaves them with few options for accessing new credit. Brick-and-mortar financial institutions are often unwilling to approve customers with financial problems as they are viewed as less trustworthy. In times of financial hardship, life crisis, or emergency, borrowers with poor credit are forced to resort to payday lenders and pawnbrokers. And the problem is that this often leads to a spiral of debt.

Making Poor Financial and Investment Decisions

Purchasing Decisions

Bad financial decisions are usually the result of poor money management skills and lack of financial literacy. People who are financially literate have good knowledge of basic concepts such as net income, annual percentage rate, amortization, compound interest, certificates of deposit, etc. People with poor money management skills lack basic knowledge and make bad purchasing decisions. They tend to splurge and buy non-essential items such as alcohol, tobacco, and candy even when they are short on cash. Many people cannot prioritize and tell the difference between non-essential and essential spending. Examples of essential expenses include things such as baby items, laundry, health-related expenses, rent, and utility bills. The list of non-essential expenses, on the other hand, includes items such as video games, haircuts, lottery tickets, dry cleaning, vacations, etc. These are things that people normally can live without. Many people make poor purchasing decisions like buying on credit and buying items they don’t really need. They also tend to make impulse purchases that they cannot really afford. Some people also buy expensive things just to show off, whether it is a new phone or laptop, vacation abroad, or a luxury vehicle. Outdoing family, friends, or colleagues is a poor idea, especially for people who live from paycheck to paycheck and buy expensive items on credit.

Investment Decisions

Many people also make poor investment decisions, and the main reasons are that they set the wrong investment goals and have a lower risk tolerance than they think of. Persons who have low risk tolerance and basic knowledge are usually advised to invest in products such as municipal bonds, certificates of deposit, and savings accounts. Those with extensive experience and high risk tolerance often benefit from investing in products such as hedge funds, penny stocks, and futures and options. Other products that help savvy investors to make good profits include leveraged ETFs, junk bonds, spread betting, venture capital trusts, and unregulated collective investment schemes. While high-risk products offer high returns, they are a good choice for people with knowledge of advanced concepts such as contingent deferred sales charge, capital gains reinvest NAV, dollar cost averaging, and Lipper ratings. Finally, savvy people know the difference between short-term and long-term investments. Short-term products include municipal bonds, short-term bond funds, and certificates of deposit. Long-term products are real estate, long-term bonds, real estate crowdfunding, and real estate investment trusts.

5 Ways to Improve Your Credit Score

May 5, 2017 By Samantha Leave a Comment

There are plenty of ways to improve your credit score and become a trustworthy borrower who uses credit responsibly. Eliminate outstanding balances, pay your bills on time, and never go over your limit to boost your score.

1. Eliminate Card Balances

This is the first step to make, and there are different ways to go about this. If you have high-interest cards, you may want to shop around for balance transfer cards with low promotional rates. In fact, some banks offer zero interest over a period of 6 to 12 months. Another way to eliminate outstanding balances is to focus on one of your cards first and pay as much as you can. Financial experts advice to start with the lowest balance, i.e. set a short-term goal that brings quick results. Meanwhile you can pay the minimum toward your other balances. The next step is to lower your utilization rate because this is what brings your score down. Simply divide the balance by the credit limit for each card to find the utilization rate. Then pick the card with the highest utilization rate and pay as much as you can to reduce the outstanding balance.

2. Pay Bills on Time – Try to Pay Your Bills in Full by the Due Date

Paying your bills on time is yet another way to boost your score because delinquent bills usually show on your report. In fact, if you are behind with your payments, including phone, electricity, gas, or other bills, it is likely that your provider contacts a collection agency. Your credit score will suffer because information about late payments and delinquent bills is forwarded to the credit bureaus.

3. Reduce the Number of Credit Applications You Make

A large number of credit applications can affect your credit score because lenders usually pull your report to see whether you are able to manage debt responsibly. They will do this regardless of whether you apply for a personal loan, car loan, credit card, or anything else. The problem here is that the number of new applications is one factor that affects your score. In fact, applications make 10 percent of your score. A major mistake to avoid is to apply with multiple providers over a short period of time. This will cost you more score points than applying for credit with one lender. Wait for some time before you apply with another provider unless you are desperate for credit. If this is the case, yes, your score may suffer, but there are other factors that lenders take into account (like whether you make regular payments and if you have a good or tarnished score). Plus your score is based on other factors such as the length of your history, your utilization rate and credit mix (vehicle and personal loans, mortgages, lines of credit and credit cards, etc.)

And even if you credit score does not suffer due to multiple applications, providers may turn your application down. This is because you applied for multiple cards at the same time.

4. Make Sure You Have a Credit history

If you don’t have credit history, it is difficult for lenders to determine whether you are a trustworthy customer. There are several ways to start building a credit history, and one is to apply for a card with a small limit. You can also use a department store card to this end, but remember that department stores usually offer higher than average rates. Another option is to apply for a small loan with your local union or bank, especially if you are a regular customer. If you have a savings or checking account with a local bank, it is a good idea to visit them first. Regardless of whether you apply for a credit card or a personal loan, make sure that you make payments on time. Late payments are one of the reasons to have a fair or poor credit score.

5. Don’t Go over the Credit Limit on Your Credit Card

This is a no-no if you have a tarnished credit score. Your score will be affected even more if you go over your limit and do this regularly. The limit on a credit card is the amount you are allowed to charge when making payments. You are free to opt out so that you don’t go over the limit by mistake. In this case, your card will be declined when you try to make a transaction. While this can be embarrassing, your credit score is unlikely to suffer. What is more, you will save on over the limit fees that some providers charge. Over the limit fees are often equal to the amount by which you exceeded the limit. If you go over by $20, for instance, the fee will be $20.

What Else You Can Do

There are other ways to boost your credit score and surprisingly, one thing to do is to leave debt on your report. Bad debt will be removed in several years anyway. Good debt, however, shows that you are capable of managing credit in a responsible manner. And the longer your credit history, the better – leave good accounts on your credit report for as long as possible. If you have credit cards with a solid record of payment, it is a bad idea to close them. Another way to boost your credit score is to contact your financial institution and ask them to erase debt. If you have a good reason, say you were unemployed over the last couple of months, your bank may be willing to do this for you. Finally, it pays to request a free copy of your report and check for any errors and omissions that affect your credit score.

Cash Advances on Credit Cards – a Mistake You Should Never Make

April 1, 2015 By Samantha 12 Comments

Cash advances are offered by different establishments, including charge and credit card issuers. Basically, this is a way to withdraw money from your credit card over the counter or from an ATM up to the available credit limit. Another option is to use a convenience check. The problem with cash advances is that interest charges begin to accumulate immediately. When you charge purchases on your card, on the other hand, you have 15 to 25 days to pay the balance before interest begins to accumulate.

There are different types of advances offered by issuers. Some companies allow customers to tap into their credit line. This type comes with a lower limit and enables cardholders to transfer cash from their card to their bank account and to write checks.

Does It Affect Your Credit Score?

The answer to this question is “it depends”. One problem with cash advances is that issuers charge significantly higher interest rates and interest accrues from the moment you withdraw cash from your account. Thus you will pay more in interest charges. If high interest payments affect your ability to cover the minimum, then your credit score may suffer. Cash advances may affect your score indirectly by increasing your utilization ratio and hence your balance. When your credit utilization exceeds 53 percent, your credit score is likely to get affected. Depending on the issuer, the credit limit for advances and purchases may be different and it pays to ask. For instance, your card may have a limit of $5,000 on purchases and $1,500 on cash advances. You may want to inquire about this so that you don’t get overextended. The more you borrow in cash, the more difficult it is to pay it back and your score may plummet. This will make it even more difficult to put your finances under control and back in order.

Fees Involved

Issuers usually charge a fee in the range of 3 to 5 percent. They normally assess fees on the amount drawn against the credit limit. With many issuers the amount charged is shown as a percentage. Thus, if your credit card company charges 3 percent, this means that you will pay $3 per each $100 borrowed. If you get more in cash, for example, $500 and your bank charges 5 percent, you will pay $25 back. Some financial institutions add this fee to the customer’s monthly bill while others deduct it from the advance. There are three types of fees involved, ATM usage fees, interest charges, and transaction fees. ATM usage fees vary but are around $2 – $2.50 on average.

Interest Rates

Interest charges vary from one issuer to another, but the rate is usually 5 – 6 percent higher compared to the bank’s standard rate. The average interest rate on advances is 25 percent but charges vary widely – from 10 to 36 percent. There are financial institutions that offer the same rate on advances and card purchases. The interest charges depend on the number of days interest has accrued. To calculate the charges on your advance, first divide the rate by 365 (number of days in a calendar year). Use this number and multiply it by the amount withdrawn and the number of days interest has accrued. For instance, if you get $800 in cash, the rate is 25 percent, and you paid back in 20 days, your bank will assess $10.96 in charges (25 percent / 365 days = 0.0684 x $800 x 20 days = 1,095.89 /100 percent = $10.96). This means that you will pay about $11 for 20 days.

Alternatives to Cash Advances

There are different alternatives to cash advances, and probably the best option is to ask your parents or family for a small low or no interest loan. Another option is to use cash in your Roth IRA. There are other alternatives to credit card cash advances such as a salary advance from your company, a collateral or secured loan, or a consumer loan from your local bank or credit union. Some borrowers also opt for payday and title loans but the interest charges are significantly higher. This is a good choice for borrowers with tarnished credit who need urgent cash. Payday loans are convenient and easy to get, and finance companies often advertise online application and instant approval. Peer to peer loans are also offered to individual borrowers. The good news is that private lenders have more lenient approval criteria compared to banks. Some lenders should be avoided at all costs because they use blackmail, threats of violence, and other illegal practices. Loan sharks are one example.

What Not to Do

Obviously, it is best to avoid cash advances altogether and use money in your savings account to meet urgent expenses. Using advances on a regular basis makes you a risky borrower in the eyes of potential creditors. It is quick and simple to withdraw money from an ATM which can lead to a downward debt spiral. The problem is that many customers find cash advances too convenient and use their credit cards to get quick cash. Some borrowers also use their cards to pay existing balances such as consumer and student loans. This is a bad idea because unsecured loans go with a significantly lower rate compared to advances on your credit card. There are circumstances, however, when tapping into your credit line makes sense. This is the case when you have utility bills or medications to pay for and there are no other ways to meet these expenses. In other words, this is a borrowing solution to use in emergencies if you have exhausted all other options.

Conclusion

Cash advances are offered by many credit card issuers, including finance companies, unions, and banks. This is a useful option in case of emergency when you need cash immediately. However, it is also quite expensive and should be used as a last resort. In addition to the higher interest rates, there is no grace period. Lenders offer high rates because they know that borrowers who tap into their line are desperate for money. Given the many alternatives available, it pays to shop around and contact local financial establishments for a small loan. If you get an advance, however, keep in mind that this is not a long-term solution to your financial worries. You should pay back as quickly as possible. Better open a savings account and use it as a rainy day fund for emergencies.