Gails Blog

Credit score! Credit Score! CREDIT SCORE! OMG! Everyone is so creeped out, wary of, obsessed with their credit score. I must get 40 or 50 emails a month on credit score: from what makes it tick to how to improve it.

Your credit score is a number that is calculated based on a bunch of factors that lenders use to decide whether or not to lend to you. Way back when I started in the biz, lenders used their own credit scoring software. They’d plug in your info and out would pop the score they’d use to decide whether or not to lend to you, and what interest premium to charge. With the growth in popularity of the FICO score, lots of lenders have given up their own credit scoring tools in favour of The Biggie.

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 consolidate a borrowers 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 the reasons they’ll be declined. I’ve received a ton of letters from people who want to know why they’ve been declined for a credit card because they don’t have a land line. Read on and you’ll see why.

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. Hey, that’s character, right? 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!

Creditor’s 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?

Home address? Live in a trailer park or with your parents? Oooops. 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 loooove to help you spend.

Previous Residence? Zero to five years (some applications only go to three 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 then 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.

It’s pretty obvious, but the more you make, the better.

Most creditors belong to at least one reporting agency and share their information liberally with each other. 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.

Having a savings and/or checking 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. (See, I told you if you were patient you’d get your answer.)

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. Hmmmm. 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. No wonder people who are over-extended are going further into the hole all the time. Credit card companies love minimum payment people and keep throwing higher limits and more cards at them. 

And no wonder the economy is in such a mess right now. What do you think would happen if all the people with credit card balances Just Said NO! and stopped making their payments? Hmmmm.

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I’ve been getting a ton of questions about credit recently. People, I can’t believe y’all have been using these products to beat the band without having the basic information you need to use them WISELY. Perhaps it’s because credit was just so dog-gone easy to get. Remember when lenders were throwing credit at us? Well, times are tougher (there’s an understatement) and so is the credit world. With all the bruhaha on sub-prime mortgages, and the meltdown in the financial sector in the U.S., a lot of people are wondering if a meltdown in the credit card world can be far behind. And since credit card debt is “callable” – they can demand their money back in full at any time – that could mean a real run on installment credit.

You stand a much better chance of qualifying for any loan and getting a good interest rate if you have a sky-high credit score. If your credit score is not as high as you would like it to be, TODAY is the day to start doing something about it.

First step, get a copy of your credit history and make sure that the information in your credit report is correct. Review your report with a highlighter to identify the factors are most likely having a negative influence on your score, and then work to improve them. Here’s a good explanation of what the various ratings mean.

If you’ve been late with payments, you need to stop doing that. While many utility bills, such as phone, cable and electricity, are not recorded in your credit report, some cell phone companies do report late payments and that will affect your score, as will late payments on your credit cards.

While I constantly tout the importance of not charging anything you can’t pay for, you must, at the very least, pay the minimum amount shown on your monthly credit card statement. To not do so sends a BIG signal that you’re a HIGH RISK borrower.

If you’ve gone over your limit on your credit card, make it a priority to get under your limit. No one will raise your limit while you’re over, and on top of paying a hefty over-limit fee on some cards, you’ll certainly affect your credit score negatively. In fact, you should keep your balance to about 60% of the limit. The closer you are to your limit, the more impact it has on your credit score.

Have you been applying for credit like a mad fool? If too many lenders ask about your credit in a short period of time, it’ll affect your credit score negatively. (Your score doesn’t change when you ask for information about your own credit report.)

If you’re desperate and thinking of hiring a company to repair your credit, don’t. Their ability to change the information on your credit file is no different than yours, so save money you’d pay them and put it toward your debt.

A credit bureau won’t remove accurate negative information from your credit report before the legal time period has expired so don’t buy the bull that there are loopholes credit repair companies can use to remove negative info.

The only way to rectify a poor credit rating is to adopt sound credit practices for a period of time.

BTW: A few people have been asking why they can’t get credit if they don’t have a land line. Simple: it means the lender can’t find you if they need to harass you for payment. Since a cell is mobile, you could move without their records being triggered. Then you’re out of reach and they’re left holding the bag!

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People are always writing to ask what the impact will be on their credit history if they cancel their cards or reduce their limits. I’m not surprised that people don’t know what to do because so much MISinformation is available. I was browsing around the web the other day and came up this advice:

If your credit card balance is zero, go ahead and close as many unused accounts as you want. As long as your credit cards are balance-free, it won’t hurt your credit score a bit. So call those card issuers and cut away.

DON’T. This advice is wrong. That’s the problem with looking for advice on the web; unless you get a S’mbody who knows what she’s talking about, you can do yourself more damage than good.

Here’s the problem with the advice: If the card you cancel has a long and lustrous credit history associated with it, as soon as you cancel the card, you lose the credit history. Ooops!

Okay, so you’ve had a bunch of cards in your wallet and you’re determined to trim your exposure to credit, here’s what you should do:

Look back over your credit card statements to see which ones are the oldest and have the healthiest credit histories – read “no missed or late payments”. You’re going to hang on to these to keep your history intact until you’ve built a sparkling credit history elsewhere.

Choose the two (at the most) cards that you want to keep. These cards should have lots of benefits: cash back, really low interest rates, whatever toots your horn.

If the card(s) you want to eliminate has a good history, start by reducing the limit on the card to reduce your credit exposure, but keep the card active. After six months, you should have built up a more solid history on your two newer cards, and can close the old card(s).

When you are reducing your credit limits, do NOT reduce your limit to the point where your balance is greater than 60% of your limit. So, if you have a current balance on the card of $1000, you’re limit should not be less than $1,700. Why? Cos part of the credit scoring system looks at how much of your limit you’ve used up. The more often you bump your head against your limit, the lower your score. That’s why paying off $50 and then immediately lowering your limit by $50 can do more harm than good.

When it comes to cancelling the card, first make sure you’ve redeemed all your rewards (cos they are HI-STO-RY) and also – very important — make sure there is a zero balance on the account. Lenders freak if you try to close an account with a balance, even if it’s because they just threw some interest on a card you thought you’d paid off in full. So before you cancel, call customer service and make sure the balance is zero.  Then:

Ask to cancel your card. If the sales rep promises you her first born to keep the card, stand your ground. Remember, you’ve already chosen the card (or two cards, AT MOST) that you’re going to keep.

Send written confirmation to the card issuer and keep a copy on file. Fax it if you can so you have a record of its receipt. Ask for written confirmation of the account being closed.

Once you receive confirmation that the card has been cancelled, wait about six weeks and then check your credit report. Remember, it’s your responsibility to verify that your credit report is accurate.

While it can be pretty dramatic (like on TV!) to simply cut up your cards, doing so does nothing to close the account. However, if you want to avoid the temptation to use a card you’re committed to cancelling, nothing beats a pair of sissors!

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We’re in a pickle. We aren’t saving enough and we’re carrying record levels of debt. Not just mortgage debt, though many of us have more than we can manage in terms of mortgage payments. Noooo. We’re carrying record levels of debt on our lines of credit, our credit cards, and the plain-ol’-boring loans. Why? Simple. We’ve forgotten how to live within our means. We’re ricocheting out of control, spending money we’ve yet to earn. We’re buying STUFF we think we NEED, when all we’re doing, really, is scratching our consumer-itch. I mean to say, do you really NEED a TV? Do you really NEED another pair of pants? Do you really NEED that better-than-ever cell phone, camera or power saw?

The fact that we can’t seem to get to the end of the month before we get to the end of the money should be our first clue. Here’s what I mean:

GA writes:

We have a $50,000 line of credit as well as $45,000 in credit card and personal loans. We have a child starting college in Sept, another following in 2 years and a 2 year old. I have tried to trim our budget but can find no leeway. Grocery seems to be the biggest budget buster. We have cut eating out to once or twice a month but still have to reach for our credit cards by the end of the month. Any ideas where I should look to trim the fat and how do I cut back on the grocery bill? It seems the costs are up every time I go to the store.

Here’s a frustrated soul who can’t figure out how to cope with rising food costs because there is no wiggle room in her monthly spending. With $95,000 in debt, a minimum repayment amount of just 3% would mean a monthly payment of $2,850 a month. OMG! I’m sorry, GA, but FOOD is not your biggest budget buster; debt repayment is.

And that’s exactly the problem so many people are facing. They can’t figure out how to repay the money they have borrowed and have a life at the same time. Not surprising, really. You’ve already spent $95,000 you haven’t yet earned (and that would be after tax dollars, I’d like to point out).

So what other clues might there be that you’re living beyond your means?

Are you saving less than 10% of your net income? Yes. Then you’re living beyond your means. You see, if someone in your family were to have a medical emergency or a blip in their employment, if your roof were to leak or your car give up the ghost, if you should have to cope with a major move, the care of an aging relative, or educational expenses, you’d be up a creek without a paddle. Right GA?  Ideally, you should save as much as you can, with 10% of your income being a guide. If you are a member of a company pension plan, that counts as savings. If you’re having money deducted automatically for bonds, that counts too. 

Are the balances on your credit cards or lines of credit rising? Yes. Then you’re living beyond your means. Paying only the minimum on your credit cards or lines of credit while you continue to increase the balance you owe is a sure sign you’re a dope. When, exactly, are you going to have the money to finally get rid of the debt? Is some magical wand-waving fairy god mother going to pop into your world and woosh away your debt? Or do you figure that a windfall is in your future? Hey, WAKE UP! If you have a $5,000 credit card balance at 18.9% and make a minimum payment of just 2.5% per month, you’ll end up forking over almost $8,000 in interest over the 25 years it takes you to pay off the balance.

GA owes $95,000. Let’s say she’s averaging an interest rate of just 11%. And let’s say she makes a payment of $2850 a month (ouch!) It’ll cost her almost $19,000 in interest and take 40 months to pay off the debt. Over-extended? I guess so.

Are you missing payments on bills? This is a sure way to ruin your credit rating and increase your interest costs. And it’s a sure sign you’re living beyond your means. If you don’t have a handle on what your monthly bills are, and what it’ll take in income to keep current, then it’s time to get with the program. Get out all the bills that have to be paid every month and make a list. Rank the bills in order of priority. You HAVE to pay your electricity bill, but you don’t HAVE to have premium cable (or any cable for that matter.) Okay, now deduct your HAVE TO PAY amounts from your monthly income in order of importance. When you run out of money, cancel everything else.

Are you taking cash advances on your credit cards? Yes. Then you’re living beyond your means. Cash advances, putting your groceries on credit, applying for new cards and transferring balances so you can fool yourself into thinking you’re paying your debt are all signs that you’re in BIG TROUBLE.

I know it’s easy to get credit. I know it’s nice to have what you want when you want it. And I know everyone else is doing it. But just because they’re all walking off the edge of the precipice doesn’t mean you should follow them. And if you’ve been walking in lock-step with a bunch of fools who can’t control their spending to the point that they put themselves and their families at risk, then it’s time to change your pace.

You don’t have to be a follower. You don’t have to continue to do what all the other dopes are doing. You can stop the insanity, take control of your future, and commit to living within your means. I know you can. Do you know you can?

I received an email the other day from a young woman named Annie who was inquiring about companies that say they’ll improve a consumer’s credit rating. Was it true? Was it worth the money?

Annie had been in to apply for a car loan at her bank and the lender had declined her loan. She was told only that she should check her credit bureau report. Something there was gumming up the works

If you don’t already know, when you sign a loan application form, you give your consent to the lender, be it a bank, credit card company and retail store, to access your credit bureau information to decide whether or not you’re a good credit risk.

Your credit file contains a listing of debit and credit payments and it includes public record information about how promptly you’ve paid bills, along with all the yucky stuff like collections, judgements and bankruptcies.

You don’t have to be a late payer to be declined. A lender may refuse a loan application simply 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.

In Annie’s case, someone else’s information was being recorded on her credit report. The other woman had a similar name, and it was an honest mistake. All Annie has to do provide the credit bureau with proof of the error and her credit report will be cleaned up.

So back to Annie’s original questions: Can a credit-repair company clean up a mess and is it worth the money? 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 fee — anywhere from $250, to $1,000 — paying down your debt, 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 repairer has the power to change or erase accurate information in a consumer’s 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 to take care of that problem yourself.

If you’ve damaged your credit rating by missing payments, carrying high balances or over extending yourself financially, you can improve your credit rating. Start 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. You must pay at least the MINIMUM to stay on the positive side with your credit history. But paying the MINIMUM isn’t going to get you out of debt. So figure out what it’ll take to get out of debt and then DO IT!

Creditors like to see a solid credit payment history. If you have a credit card, use it every month. Make small purchases and pay them off IN FULL. If you can’t get a credit card — maybe you’ve just come through a bankruptcy —  use a secured card. You deposit money with the lender and they give you a credit card with a limit of between 50% and 100% of the amount you deposited.

Can’t cope with all the bills you’ve got? You have two choices. Declare bankruptcy or find a way to put more money toward you bills: cut expenses or make more money.

You should check your credit files at least once a year to ensure the information is correct. Send a written request to one of the two major credit bureaus in Canada: Equifax Canada Inc. or Trans Union of Canada Inc. More information can be found online at www.equifax.ca and www.tuc.ca. There is no charge for this service. If you’re into instant gratification, 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 behavior by paying your bills on time and managing your credit wisely, the more your credit rating will improve, until you once again achieve a favorable 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.

I recently worked with a new couple that made go, “hmmm”. She’s only 26 and already owes over $40,000 in consumer debt, even though she doesn’t pay a cent in rent and has virtually no real expenses. Sure she has a cell phone and a nice car, but they’re toys, not tools of her trade.

He went nuts with his credit cards when he first got them – yes, he join three separate gyms – and then froze his cards. He’s been working to pay them off ever since. He’s paying in the high teens and mid-twenties when it comes to interest, but has never considered negotiating his rate down.

So what happens to us to make us think that when we’re using our credit cards we aren’t really spending real money? How do we come to delude ourselves? What lets us rack up thousands of dollars in debt without batting an eye? And what lets us carry around balances on our credit cards, at huge interest rates, without losing our minds?

Hey, I know there are people out there who use their credit to make ends meet. Lose a job, have a child get sick, or watch your car die in the middle of a highway, and the idea of putting it on a card and carrying a balance becomes a secondary issue to taking care of the BIG problem.

I’m not really thinking of those people. I’m thinking of the people who bemoan their debt while booking their next cruise. I’m thinking of the people who can’t drive a regular car, they have to drive a car they really can’t afford. I’m thinking of the people who can’t seem to find the money to repay their old bad spending habits because they’re too busy traveling (on credit), eating out with friends (on credit) or shopping (on credit.) What makes those people immune to the gut-wrenching stress that other people feel when they owe money?

Is there such a thing as a debtor personality? Or is it simply a case of being clueless?

Psychologists have done some research on the issue of debt personality. Some believe that people who accumulate debt also:

• Lack the ability to plan
• Are not reflective in their thinking
• Have an urge to be active
• Are impulsive
• Can be anxious or apprehensive about making the wrong choices
• Need excitement and novelty
• Tend to disregard possible negative consequences.

When I ask my fams what they spent their money on when they were going into debt, they can’t tell me. When I look around their homes I may see some evidence of their debt, but very often they don’t have a lot to show for the amount of debt they’re carrying. And when I show them how much money they’re spending, they’re stunned. Some accuse me of making the numbers up. Ha! I don’t have to; they’re great all on their own.

So how do we get so far away from the idea that what we’re doing is SPENDING MONEY and that at some point in the future that money will HAVE TO BE REPAID?

Part of the problem stems from the “Minimum Payment” … the idea that you can have what you want now, for as little as $10 a month. Hey, but that’s $10 a month FOREVER. Do that a couple of dozen times and now you’re up to $240 a month. Do that four years and now you’re up to $960 a month… and you’re no closer to ever being paid off. Ouch!

It’s easy to use credit. It’s hard to pay it off. And if your circumstances change and you find yourself with less money in the family pot, you can really strap your ability to roll with the punches if you’re carrying around a bag of debt.

It’s time to become a little more reflective in your thinking. It’s time to learn to plan. And it’s time to stop disregarding the possible negative consequences of your rampant spending.

Want some real excitement? Try living on half your income so you can put the rest to debt repayment. Have the urge to be active? Get another job and use all the income to pay off your debt. Impulsive? Eliminate the temptation: don’t carry your cards and stay out of the malls.

There’s always a solution. If you really want one. So, do you?

Whenever I tell my daughter, Alex, that I have some good news and I have some bad news, she always wants the bad news first. Like mother, like daughter. We figure if we know the worst first, we can put everything else in perspective.

So here’s the worst: Bankruptcies in Canada (and no doubt in the U.S.) are on the rise.

Are you surprised?

According to the Office of the Superintendent of Bankruptcy, in the 12 month period ending in April 2007 almost 85,000 Canadians ranging in age from 18 to 90-something filed for personal bankruptcy. They owed, on average, $69,619 each.

A year later, the number of people who filed for bankruptcy jumped to almost 88,000. Add in the over 23,000 people who filed consumer proposals, and you have over 110,000 people who are so far up to their eyeballs in debt they can’t see daylight. Sad.

Often debt starts accumulating when kids head off to university. They’re offered a credit card with what appears to be a reasonable limit so they can “learn to manage credit.” Soon, however, that $1,000 mushrooms to two cards, student loans, a consolidation loan, a line of credit and a car loan. Suddenly – really? suddenly? – a young adult has way more debt than they can ever hope to repay on a starter-income.

So, how does a student get a credit card? Beats me. At no other time in your life can you walk up to a lender and say, “Hey, buddy, I don’t have a job and I don’t have any way to repay debt, but how about a credit card?” If you don’t believe me, try it!

Yet kids who have no experience managing money – never mind credit – are given student loans, credit cards and other forms of credit without a minute of education. Is it any wonder so many trip and fall?

Sometimes people file for bankruptcy because of a relationship breakdown or a loss of employment with a side-dish of with poor money management. It seems that the Eternal Optimists among us believe that they can count on a steady dual income for years to come, and so rack up enormous amounts of debt for the things they just HAVE TO HAVE RIGHT NOW. We’re talking shoes, big screen TVs, digital cameras, hardwood floors. Nothing you can boil for soup should hard times hit and you have to feed your hungry children.

Then there are the people in their 50s and 60s who are finding themselves strapped. Caught between elderly parents who need care and kids in university, parents are borrowing themselves into very deep holes and then going bankrupt when they can’t meet their payment obligations. Here again, bad money management is at the root of this issue. After all, it doesn’t take a genius to see that if your kid is half-way academically inclined you’re going to want him or her to go off to university. And the idea that your parents could grow old without you noticing is ridiculous.

As if life isn’t hard enough, there are also temptations that rear their ugly heads and end up biting us in the butt. Can you believe that when bankrupt consumers were asked what had contributed to their dilemma, 31% reported that home shopping channel, casino visits, lottery tickets or on-line poker influenced their financial situation? Are you kidding me? People, no one is making you go into the casino. If you have a problem, don’t go in the door!

I bet you’re wondering what the good news is.

It’s this: Bankruptcy isn’t the worst thing in the world. Living in the hell you’ve created is. And if you’ve been given a whack of credit that’s way above what you can manage, maybe it’s time to rub the slate clean and start again.

I’m not for absolving people of their personal responsibility. Nope. I’m all about personal responsibility. But when I see couples earning $100,000 in family income being given $136,000 in credit, I scratch my head and wonder whatever happened to “responsible lending practices.” And I feel for the people who have debt they can’t manage because of significant changes in their lives like disability, divorce, widowhood, illness, unemployment, and the like. I even feel for the silly buggers who went out and charged up a storm, never understanding the implications and the impact the payments were going to have on their rest of their lives.

It isn’t an easy decision, deciding to go bankrupt. Nope. It’s a thorny path. But if that’s what it’ll take to get you out of hell, then do it. It won’t be easy to live through. And the black mark will stay with you for a long time. But there is an end. And you can have a life – a good life – after bankruptcy.

If you’re feeling pretty desperate about your situation and wondering if bankruptcy could be an option for you, start by reading the FAQs on bankruptcy at http://strategis.ic.gc.ca/epic/site/bsf-osb.nsf/en/br01407e.html. Then have a look at Deal With Debt, a Consumer’s Guide at http://strategis.ic.gc.ca/epic/site/bsf-osb.nsf/en/br01035e.html.

Oh, one more thing. While bankruptcy is considered a last resort, with a Consumer Proposal being the much offered alternative, it behooves you to know that regardless of which you choose, your credit history will be crap for the same amount of time since, as for as creditors are concered, a proposal is as bad as a bankruptcy.

Now, go make a decision.

BTW, The Canadian Capitalist (http://www.canadiancapitalist.com/2008/06/16/smith-manoeuvre-who-profits#comments) — this is a truly terrific blog — has a great piece on the Smith Manoeuvre. Not only should you read his post, you should also read all the comments that go with it.

I’ve been swamped with questions recently, and many of them are far more sophisticated than I’ve been seeing up until now. Before I get to some answers, let me reiterate: If I’ve answered a question similar to the one you’re asking before, I won’t answer it again. You’ll have to search my site for the answer. See the How to Use This Site on the home page.  

Here we go:

Hi Gail, our mortgage will soon be up for renewal and we would really appreciate your advice: would you go for a plain simple mortgage (we’re considering President’s Choice PC points plus for a 5 or 10yr fixed term) or would you consider a ‘home equity diversification plan’ (through Investor’s Group) that replaces a mortgage with a home equity line of credit that consists of 2 sub-accounts, one for the mortgage and the other for investment lending to make regular investments into a non-registered portfolio of mutual funds that ’should be’ tax deductible according to the brochure we have. I do our own taxes and this one sounds kind of confusing to me but I would appreciate your advice. Also my 2nd question is do you recommend registered or non-registered investments? Thank you so much for your time in reading my email and we will wait for your response.

Okay, J, here’s the long answer. The product you’re being offered is one that allows you to use the equity in your home to secure a loan for investment purposes. Each time you build up some equity, the loan would eliminate the equity and the money would be used to buy investments. The upside is the interest on the loan for investing is tax deductible. The downside is if there’s a reversal in the value of your investments – if the value goes down – you’ll still be on the hook for the loan. And since you’re not building any equity in your  home, you have to “safety net” there. If it were me, I would go with the vanilla-flavoured plain old mortgage.

Now here’s the short answer: If you don’t understand an investment, or you’re not sure you should do something, THEN DON’T DO IT!

As for your second question: registered or non-registered. That depends on how close you are to retirement (the further away you are the more the RRSP works for you), and what type of investments you’re buying (interest-bearing investments are tax sheltered in an RRSP).

My husband and I are in a tricky financial situation–my husband is in a position where he has to change careers, which would necessitate us buying a house in a location where prices are EXTREMELY high. We are looking at having to spend approximately $350,000 for a moderately priced home that will suit our family. Our problem is this: we have extremely high credit card and line of credit debt, dating back to my being laid off from my job and going back to school. We foolishly kept living the same lifestyle on credit, thinking that my earning power once I graduated was going to be much better than it actually was, at least initially. Poor choice, I know!! Anyway, we are concerned because every mortgage calculation site we have visited has indicated that despite the fact that we have a combined monthly income of approx. $6500, our debt load is too high. We are working toward paying down our debt and have scaled back considerably in all areas (We watch your show, so w e knew just how to do it!). However, we may need to purchase a home in the very near future (renting here can be more costly than a mortgage, so it seems the better choice). Would we be able to get a consolidation loan, or put some of our debt on our mortgage even though it is unsecured debt? Please help!

S: The big problem with living life like tomorrow will be better is that life has a way of biting you on the ass! Carrying debt is one of the best ways to LIMIT YOUR OPTIONS. I’m sorry that you’re feeling squeezed and that your options are limited by your current debt load. Unfortunately, a consolidation loan doesn’t reduce your debt load, it just moves it – hopefully to a lower interest rate option. If you do consolidate, and end up paying less in interest, more of your payment will go toward paying down your principal. That’s a good thing. However, unless you find stuff to sell or find a way to make more money so you can get that debt paid down, in all likelihood, you won’t qualify for the size mortgage you’re looking act. Sorry to be a bummer.

Thank you so much for your show. I have learned so much. I find it hard to apply many of the ideas you present. I am a full-time law student. I work part-time during school and am working full-time right now. I get the maximum amount of student loans. Tuition is so expensive, as is my rent, that I still need to make up the shortfall with a personal line of credit. Before going to school I had no debt and fairly decent savings. I still have the savings, which I intend to use for a downpayment on a house in a couple years. But this living with debt over my head is a very unpleasant feeling. I know I am going to get a decent job once I graduate. I have some rather large expenses for things I would really like to have now. For example, I would love to get orthodontic work done while I’m in school. I could live without a car but really really don’t want to…and my current car is falling apart on me. Is it an absolutely horrible idea to bank on future income? The line of credit is at a decent interest rate. The student loan will take some time paying off, but once I start working it really won’t be a problem. Should I wait?

A: See my previous response and the mess S got herself into thinking that it’s okay to spend money you haven’t yet earned.

My husband & I have never used credit cards much, and we have raised our sons to be frugal, or at least thoughtful in their money habits. Now our oldest is 19 and has run his finances well for several years. He is eligible for a credit card and we are eager to see him begin to build a strong credit rating. Does a credit card have to be used to develop this rating, or is it enough to hold one unused — either in a safe deposit box or perhaps frozen in a block of ice as I have seen on a terrific TV show we all enjoy?

Kerry: the only way a credit card works to build a credit rating is if you use it and pay it off religiously. So, yes, he has to use it. And it is THAT experience – using it and paying it off on time and in full every month – that is the real lesson.

Love your show! My fiance and I are engaged and have been together for 6 years (living together for 5 of them). We have always had separate accounts/money except for our mortgage. We split the bills. We both have student loans and car loans. I feel it would be easier to have our finances become one (and maybe just reassuring to me to know exactly whats going on). I have goals to buy a home and have a family soon, but want to be sure we are financially ready. Am I being to controlling? What is the norm out there? It seems my friends who have joint accounts communicate better about finances.

T, there is no norm. But being able to communicate about money is a key part of being able to stay married for a long time. Go read the stuff under Getting Married on my blog. Then TALK!

I have been working on a plan in place to pay off all of my consumer debt (2 years remaining). All of my hard work is about to be thrown into chaos: my work has given me more responsibility on a lower pay scale, which has also changed my union. I am now making less gross ($3k/annum), paying double the union fees and this new union of mine is planning on striking in two months. I already had the financial struggle that my daughter is about to lose her job (in a month) and may be unable to continue to contribute temporarily.  How do you prepare for a financial disaster on such short notice? My emergency fund isn’t large enough to accommodate this many disasters at once.  

Karen: there’s no way to prepare on such short notice for so many changes at one time if you don’t already have an emergency fund in place. You’re going to have to buckle down and find a way to cut your expenses. Can you take in a renter? Can you (and your daughter) find part-time jobs? Can you sell something that will bring in some income?

I’m sorry I can’t be of more help. There are no magic strategies for this situation. You just have to get creative and find ways of cutting back or back-filling your budget. Good luck.

Hi Gail, I have been using your interactive budget since February and love it!!!  All but 2 categories make perfect sense to me: I understand the fixed expense category ‘Maintenance/improv/condo’ to cover expenses for the building/property you live in, such as paint, repairs, upgrades etc.  However, what category covers things like necessary home furnishings?  We recently needed to replace lamps and I’m not sure what category these fall under.  Also, would you elaborate on what the ‘Family/gifts’ category would include beyond gifts?  Thank-you so much for sharing your wisdom.  

S: furniture and other big-ticket stuff you want to buy comes under Capital Expenditures. As for Family/Gifts, that would cover presents for b/days and other holidays, and if you’re helping to support a family member, that’d go in here too.

My question is this, what are your thoughts on shopping at Costco? I like to shop at Costco because they have such good prices on food and I have tried making a budget for groceries, but it is hard to come out of Costco without spending under a $100 dollars. Do you recommend to people on Til’ debt us do part that stay away from Costco?  

M: I don’t tell people to stay away from Costco. I like the store. A lot. Their prices can be fabulous. I always go in with a list. I only buy what’s on the list. I never spend more than I plan to. That’s my advice.

When should you consider consolidation? I’ve been thinking it’s the best option for us but I often see you have folks try to reduce interest rates on credit cards instead. Is there a preferred method or does it vary? What questions should we be asking to help us understand what the next steps are? By the way, your show is very helpful and I try to watch it often. Our debt ratio is .2998, but we don’t’= have the best credit out there. No bankruptcy, or past dues (although we have occasionally been late on payments), but we have a lot of credit and are cosigners on both of our son’s student loans. I have not checked our credit score in over a year but it was not great then.

M: I recommend people consolidate to a) reduce their interest cost, b) get one single monthly payment and c) limit the amount of time it takes to repay their debt. If you don’t have a good credit history, in all likelihood you won’t get a good (low) interest rate, since your history is part of what goes into setting your interest rate. So you should be working at negotiating with creditors to reduce your interest rates on the individual cards.

Hi Gail, I love your show and would love to be on it unfortunately it is for couples only. My question is: At present I have approximately $8ooo of student debt remaining. I am interested in buying a condo or a townhouse and am wondering if it is the right time seeing as I have only recently begun saving more. Should I wait until I have at least 10000- 15ooo$ before I consider buying or it is feasible to do so at this point? Any input is very much appreciated.

Monique: I can’t tell you if it’s the right time to buy. That depends on whether you qualify for a mortgage, and how much, and whether you can manage the responsibility of home ownership. I have a number of articles on the site about this, so go read them.

I’ve read your articles about kids and money, and think they are great, but we are having trouble with the idea of $1 per year of life with our 9 year old. Currently, all he uses his $3 pocket money for is candy, we make his lunches (there’s no cafeteria at school). Could you expand a bit on what things you think a 9 year-old could and should be paying for?

Hi Andrea. I define an allowance as, “The money you would normally spend on your child, put in your child’s hands so he/she can learn to manage it.” If you son likes to watch rented movies, he could use his allowance for that. Or for buying software for his computer/gaming device. Or to buy books. Whatever you find yourself laying out money for, he should be buying (not the necessities of life). Over time, as he needs more money to meet his needs, you can increase his allowance, or give him the opportunity to work for more money.

My other half is very reluctant to take any financial risks as a result of seeing his parents make some very costly errors for which we are now picking up the pieces. This becomes most noticeable when we discuss buying a home. He has a number of reasons against this: 1/ it’s too expensive compared to rent, 2/ if something ever happens (such when his father got cancer or if one of us were to lose our job) we could move according to our new requirements much more easily. On the other side I’m afraid of still having to pay a mortgage when we retire. I understand that there may be an argument for renting over buying a home but I think it requires a very disciplined saving strategy. How can we get on the same page on this? Should I accept that buying isn’t for everyone? It seems it may come down to emotions rather than finance as no matter how much we talk his fears remain the same. Thanks so much for taking the time,

L: you and your husband are going to have to sit down and hash this out. There’s no right or wrong answer on the own versus rent question, it’s a matter of what suits you. But your differing objectives could be a point of resentment later if one or the other is forced to do something that goes against the grain. So you’re going to have to work it out. Maybe if you went to see an advisor who could show you the black and white of it (or use some of the tools on line), that would help you come to a consensus.

My husband came to Canada in 1998, the first 7 months we lived with my parents. We saved up money towards a downpayment on a condo. I got pregnant and that’s when our debt started building up. Now, I happy to say that we moved house and debt free (excluding fixed mortgage). Several years have passed and managed to save some money. My question is that the money saved is just sitting in the bank. How can I convince my husband to start thinking about our family’s future and make the money work for us? I believe that he still feels scared that we will go from black to red. Please reply back with some suggestions. Thank you

A: Same as above. There’s no right or wrong way to invest. But you have to come to some kind of agreement.

My husband will be living on his own in another province for a new job. My son and I will be joining him in a couple of months. How do I set up a budget to keep track of both households?

Deena, the same way as you would if you were living in the same place… you’ll just have much higher expenses

I have a department store card, which I rarely use. I always maintain a zero balance as well. Recently when I went to use the card I was informed that the department store cancelled the old card and replaced it with a new card (new number) since it had not been used in over a year. How will this affect my credit report? If this does negatively impact my credit history what steps must I take to rectify the situation? Thank you for your kind assistance.

C: you need to check with the credit bureau to see if it had an impact. Perhaps not. I’d be more concerned about the company issuing me credit I hadn’t signed up for.

I am carrying a balance of $18,000 on my line of credit with an interest rate of prime plus 1.75%. I currently earn $58,000 a year and have not savings. I am 40 years old. Between paying mortgage, condo fee, living expenses (food, gas, etc), and paying towards debt repayment. I find that I don’t have any extra cash for savings or needed extras (like clothes for work). These expenses go onto my credit again. Since I’ve bought my condo, the value has increased about $30,000. I’ve been thinking about adding my credit line balance into my mortgage, — re-financing my mortgage, to add in my line of credit balance. This will leave me without “consumer” debt and I would have cash flow every month for savings and buying things with cash. Is this a good idea?

M, this is only a good idea if you save the difference and BUY NOTHING until the $18,000 is paid off

We are now faced with a decision: we declare bankruptcy or go with a proposal offered by BDO Dunwoody Ltd. Are they promoting themselves or is this really in our best interest? Very desperately yours

AM & M: I doubt that the company is “promoting” itself, but if you’re in doubt, get a second (and third) opinion. I have worked with several people who have been given bad advice when it comes to declaring bankruptcy or using a consumer proposal. I don’t know your circumstances, so I can’t comment. You could read up on the bankruptcy rules to see if that would be better for you. (Go to bankruptcycanada.com).

HI Gail! I have a question that has been on my mind for quite some time: we are a one income family with young kids, our yearly income is about 55k. We’re still renting, but planning to buy a house very soon. We will have about $30.000 for the down payment (in-laws are giving a “pre-inheritance”). We have 2 credit cards with zero balance, and a LOC with about $4.000 on it. Our credit score is very good. My question is, should we call the banks and ask them to lower our limits (one is at $12.000 and the other $ 9.000)? I think those amounts are just ridiculous, but will lowering the limits affect our mortgage at all? If we should ask them to lower them, what amount do you suggest? Should we cancel the other card altogether, and just have one credit card? Thank you in advance, you’re my hero!!

M, great question. Yes, the amount of credit to which you have access does affect your ability to qualify for more credit. Go get those limits lowered!

Hi Gail, My girlfriend of 2.5 years recently told me that she has $40,000.00 worth of credit card/line of credit debt. This year I was planning to propose to her, but with this debt and the fact that I am just learning about it despite several attempts on my part to ask her about her money situation, everything is in doubt. I want to help her with this, but can’t help but feel angry that she lied to me (or withheld the truth…same thing in my books). Any advice on how to navigate this situation?

D: I think you both need to come clean on your finances. And you need to tell her how you feel about her “secret.” She may have simply been embarrassed. But people who love each other don’t need to worry about embarrassment, right. They just need to worry about honesty. So sit down over a nice dinner, with all your paperwork in hand, and tell each other the truth.

I loveeeee your show and practical saving methods. My husband and I just bought a vehicle and purchased it through our line of credit. The dealership wanted to charge us 9.5% interest because it wasn’t a new vehicle. I harassed them asking what happened to 0% financing, but they wouldn’t budge and told me good luck on getting a better rate. Anyhow, we purchased the vehicle and used our line of credit. Because we were able to increase what we could borrow from our line of credit, we lowered our interest rate from prime plus 3 to prime plus .5. I thought it was an ok deal, but obviously the bank is still making their 2 cents worth and then some. My question is, currently we’re paying 5.75% with 41,000.00 owing and 5.2% on our mortgage, which we’ve only had for 1.5 years now. When we have extra money, what makes more sense, to pay the mortgage because we owe more or the line of credit to get it out of the way? We pay on our line of credit every 2 weeks and will be increasing the payment close to 100.00+ extra due to my husbands promotion. I just want to pay where it will count!!

D, pay off the line first. It’s the debt with the highest interest rate.

Hi Gail, I got married about 6 months ago & the only debt my husband & I have is his car loan. We pay $482 a month & have about 37 months left. We are currently renting my mom’s basement apartment & would like to purchase a home in 3-5 years. Would it be beneficial to pay off the loan from our savings & start from scratch? Thanks for your help……

J, if paying off the car loan will save you a bag of interest, yes. Then you can put the money you were using to pay the car loan towards your home downpayment savings. Make sure you set up an automatic savings program so that you aren’t tempted to skip the savings.

My husband and I bought a timeshare in the states and we live in Canada. Its a loan. At the time we thought it was a good idea to get it but now really thinking about it, not really. Now we just added more debt to what we already had. We would like to sell it but not sure how to do it. What would you recommend?

K, sorry, I don’t know squat about timeshares. Anybody else know anything?

How do you get out of debt when students loans are out of control? My husbands student loans are extremely high, he can’t get a loan for anything and when we bought our house 6 mos ago it had to go in my name only because the interest rate would have been higher if his name was on the house?? Just so lost and financially whipped that there is nothing to save?? Don’t know how to pay of his loans and we have collection agency calling about him almost everyday now. Should I consult a financial advisor to help us out and put us on a budget?? Any advice would be appreciated watch you show when I can am a big fan of yours.

T, there’s no magic to getting out of debt. You have to find a way to get the money to pay down the debt.  You can cut expenses. You can make more money. You can sell something. Them’s your options.

If you think that debit and credit card fraud is something that happens to dumb people, let me assure you some of the smartest people I know have been hit. In the town where I buy my groceries, hundreds of customers of one of the supermarkets were hit when their debit card and pin numbers were stolen.

Closer to home, Chelsea, our production manager – and a very button-down chick and as smart as a whip – went shopping one day only to find her debit card had been skimmed and she was out thousands of dollars.

Here’s what Chelsea has to say about her experience:

My debit card was “skimmed” on the weekend - meaning someone illegally scanned my card and recorded my pin and went on a shopping spree.  It took them less than 24 hours to create a fake card and less than 36 hours to rack up 15 transactions, stealing about $3,000.  This is a real problem and not just something you read in the papers.

Here are some ways I’ve researched that you can prevent this from happening to you:

• Hide your pin.  Seriously hide it.  You may feel like a dork but just do it. 
• Watch your card.  If someone swipes it twice, ask why. Chances are they’re skimming it right in front of your eyes. 
• Check your bank statements online at least once a day.  Look for cash withdraws and purchases that look unfamiliar (duh). 
• Make sure you have minimum cash withdraw limits on your accounts.  Having a higher limit means that someone can’t go in there and clear out your account in one day.  I have a limit of $500 and sure enough, the bank told me, they attempted to take out more but were unsuccessful. 
• If you have overdraft protection, someone can take money that you don’t even have. 
• Take off access to accounts from your debit card that you don’t need.  Make all of your credit card payments online and then take the access to your credit card off of your debit card.  I had mine linked and they took a $500 cash advance from my credit card.  
• Use cash wherever you can (cue Gail cheering with glee).  Even some ATMs have been rigged with skimming devices so watch out.  I almost feel like I have to go back to the old fashion days of getting cash from a teller and using cash to pay for everything.

I’m pretty sure I know what store this happened at.  It wasn’t a shifty convenience store; it was a regular retail outlet store – nothing shady so it can happen anywhere.

I’m not trying to make you lose sleep every time you swipe your card but there are things you can put in place to protect yourself just that little bit more.  I don’t want this happening to anyone else.  This situation really stinks but I hope that by reading this you can be proactive and look into how your account is set up and be more aware of this issue.

These are all great ideas from Chelsea. Pass them on. And here are a few more to keep in mind:

• Watch out for “shoulder surfers .” Shield the keypad when using debit and ATMs.
• Keep your receipts. Ask copies of incorrect charge slips.
• Compare receipts with account statements. Watch for unauthorized transactions. Shred receipts after verifying the charge on your monthly statement.
• Carry only the cards you need. Extra cards increase your risk and your hassle if your wallet is stolen.
• Pay attention to your billing cycles. A missing bill could mean a thief has taken over your credit account.

Some people are of the opinion that if they have a dollar in their pocket they should spend it. In the old days, people talked about money “burning a hole in their pockets.” So this isn’t a new problem. But as we’ve become more financially sophisticated introducing new products and services, we’ve made it easier and easier to people to put a dollar in their pockets to burn a hole.

I’m just finishing up the paperwork for a fam who have, at the ripe old age of 20-something, run up $100,000 in consumer debt. Yup. You read right. They’ve spent and spent and spent. And their various suppliers of credit have helped them by giving them access to over $130,000 in credit on a income that doesn’t come close to that. Whazzup with that?

They have no idea where their money is going. And I can only tell them a part of the story since they’re withdrawing gobs of cash and keeping no records. Bank machines may be convenient, but they’re also deadly.

Once upon a time there were a few, then we demanded more. Banks discovered that bank machines were way cheaper than bodies, and that they could eliminate the bodies completely in some places. Branches closed and were replaced by machines. According to the Canadian Bankers Association, we did over 667,000,000 cash withdrawals from banking machines in 2007. Wow!

Did you know that the world’s first banking machine was installed in a branch of Barclays in Enfield, north London, in 1967? In a little over 40 years, they’ve become synonymous with “convenience.” In fact, the CBA says, “ABMs are the primary means of banking for 34 per cent of Canadians.”

The USA was the country with the most cash machines — 405,000 — in use at the end of 2006. By comparison, Canada had 16,190 machines spitting out cash in 2006.

Since we don’t have to wait for the branch to open to get our money, and since we don’t even have to go to our own bank machine - we can get at our money everywhere from our local corner store to the gas station to the casino — we’re putting more money into our pockets to burn that proverbial hole.

As if that’s not bad enough, the money in our accounts isn’t the only money we’re spending. Nope. We’re also spending money on our credit cards (and other forms of credit), sometimes even taking cash advances - more cash in our pockets - so we can do whatever we want whenever we want. And when one card fills up, we just sign up for another, and run that card to the limit.

We’re committing financial suicide and we don’t even realize it.

As if it isn’t bad enough that we’re spending money we haven’t yet earned - yes, when you use credit, you’re spending money you’re going to earn in the future… if you’re lucky - we’re also ruining our credit scores, making it more difficult and expensive to borrow for something important like, let’s say, a home.

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. In fact, you’d do well to 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!

Of course, as far as I’m concerned, you shouldn’t be carrying any balance on your credit card. If you do have a balance, put your card away so you can’t use it until the balance is completely paid off. Once you get back to zero, here’s how you manage your credit use so you don’t run into trouble again.

First, get yourself a notebook or a chequebook register (available at your bank).

• Write the current balance in your bank account at the top of the page.
• Each time you use your credit or debit card, write a cheque, or take a cash withdrawal, enter the amount you have spent and minus it from your balance.
• Every time you make a deposit, add it to your balance.

There now, you have a real-time balance that shows how much money you really have to spend, and you can’t spend money you’ve already used elsewhere (like on a cheque that hasn’t cleared, or on a credit card that hasn’t come due).

Don’t forget to debit the automatic withdrawals that come out of your account: your mortgage or rent payments, car loan, pay-yourself-first-savings, retirement account deposit, utilities, car insurance, and the like.

Finally, when your credit card bill comes in, check the transactions against your list in your notebook. If there’s something on your statement that’s not your doing, call the credit card company right away and identify the wayward transaction.

There now. You have the means to stay in the black.

The question is this: Do you have the will?