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5 credit tips to put you on a path to borrowing responsibly (and saving money)

According to the Educators Financial Kickstart Challenge, 54% of education members have debt (other than a mortgage) that they would like to get under control.

This can seem particularly challenging in the early part of your career, when you’re typically earning less. So it shouldn’t come as a surprise that a recent BDO Canada survey has discovered those who are struggling with debt the most are Canadians in their 20s and early 30s.

But don’t think debt stress is something that is solely experienced by those who are ‘young and cashless’—or in the case of education members, lower on the pay grid.

The latest numbers from credit-reporting agency Equifax point to Canadians between the ages of 46 and 55 as having the highest amount of non-mortgage debt—carrying an average of $34,100 each. That’s $11,000 more than the national non-mortgage debt average of $22,800.

Regardless of age or income level, smart debt management is something anyone can learn to do. You can start by keeping these guidelines in mind:

#1: Borrow only when you need to.

If your goal is to own a home, buy a car, or make any other sizeable purchase, you’ll most likely need to borrow some money (unless you’re fortunate enough to fall into a big lottery win or sizeable inheritance).

Just remember that borrowing always comes at a cost. So do it only when you need to, and consider the following factors to make sure that it’s worth it:

Rate of interest
The higher the rate, the more it will cost you to borrow, so calculate how much interest you’ll be paying over the term to see if it’s really worth the extra cost.

Current level of debt
If you’re currently paying off other forms of debt such as a car loan and/or credit cards, consider paying down this debt first before taking on any more.

#2: Borrow only as much as you need to.

Just because you get approved for the maximum amount doesn’t mean you should go ahead and borrow (or spend) it all. You have other expenses to consider, after all, and you don’t want to overextend yourself.

A good way to gauge your comfort level when it comes to borrowing is to stick to the 35% Rule—this means keeping your credit usage to no more than 35% of your borrowing limit. For example, if you have a credit card with a $3,500 limit, you should aim to keep your carrying balance at no more than $875.

Of course, your ultimate goal should be to maintain a zero balance because the higher your balance gets to your credit limit, the harder it’ll be to pay. Plus, if you are continually coming close to maxing out your limit, it could raise red flags with credit-reporting agencies and lower your credit score.

How to credit score: 5 things you need to know about credit and debt.

#3: Make informed borrowing decisions.

When it comes to borrowing, be sure to take the time to educate yourself on the pros and cons that come with each of your credit options. Having clear expectations, right from the start, will enable you to map out a debt payment strategy that works within your goals, budget, and timeline.

Borrowing Option  Pros  Cons
Personal Loan
  • Set payment term
  • Can be paid off anytime
  • Higher payments
Credit Card
  • Low minimum payment
  • Revolving limit
  • Typically charge the highest interest rates
  • Can have debt for life
Line of Credit
  • Similar to a low-interest
    credit card
  • Revolving limit
  • Can be paid off anytime
  • No set payment term
  • Can have debt for life
Mortgage
  • Set payment term
  • Lowest borrowing rate
  • Pre-payment restrictions
  • Not easily refinanced
  • Long amortization

Did you know? The reason interest rates on credit card balances are so high is that the loans underlying those balances tend to default at a higher rate than other types of loans.

#4: Don’t just compare interest rates—understand them.

When it comes to rates, cheaper doesn’t exactly equal better for your mortgage.

In some cases, accepting the lowest rate might mean that you’re sacrificing the ability to make extra payments or will have to cover incremental charges if you need to break your mortgage early. So be sure to read the fine print to see whether there are any limitations associated with the ‘lowest’ rate before you sign.

Better yet, ask your lender for full disclosure on the terms and conditions of borrowing so you don’t run into any surprises down the road.

#5: Always aim to pay back what you borrow sooner rather than later.

If you’re on target to reach your 85 Factor at age 58 (the average retirement age for education members), your goal should be to be debt-free by the time you start collecting your pension. The thing about goals, however, is they are often sidelined by a little thing called ‘life’.

Here are a few simple strategies to speed up the debt repayment process that don’t require leaping to the next level on the pay grid, no matter what life throws your way:

  • Make more than the minimum monthly payment (whenever possible)
  • Pay off debt with the highest interest rate first
  • Consider lowering the limit on your credit cards as you pay them down
  • Set spending limits or only pay with cash—a great way to stick to your budget!
  • Consolidate your debt so you’re only paying interest on one loan
    (versus multiple loans, credit cards, etc.)

In summary:

1. Borrow only when you need to
2. Borrow only as much as you need to
3. Make informed borrowing decisions
4. Don’t just compare rates—understand them
5. Always aim to pay back what you borrow sooner rather than later

When in doubt, call on us for borrowing advice and options that offer an educator-specific perspective.

From mortgages that offer you cash back and competitive rates, to loans and lines of credit that enable you to consolidate your high-interest debt into one manageable payment—regardless of where you are on the pay grid, or how much your pension income is in retirement, Educators Financial Group offers you the right options to meet your borrowing needs.

Put the Educators borrowing advantage to work for you. Have an Agent-Regional Director contact you.

Sources:
Late payments set to rise on Canadians’ $599-billion of credit card, non-mortgage debt, Equifax predicts
https://www.msn.com/en-ca/money/topstories/nearly-1-in-4-canadians-feel-crushed-by-their-debts-bdo-canada-affordability-index/ar-BBOiEfs

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The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.

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