Rita Trichur - Business Reporter
The slowdown in Canada’s housing market suggests consumers are being more “prudent” with credit after racking up a record amount of household debt earlier this year, says one of this country’s top bankers.
Gerry McCaughey, chief executive officer of the Canadian Imperial Bank of Commerce, said he is confident that Canadians remain capable of keeping up with their payments – despite much hand-wringing in recent months about skyrocketing household debt.
At an investor conference sponsored by his bank in Montreal, McCaughey suggested that the slowdown in mortgage lending is positive even though it means weaker loan growth for banks.
“I think the consumer probably is taking a pause and acting in a prudent fashion, and that’s what’s driving this slowdown in the housing market,” McCaughey said.
“And I think that is a good thing because, as I say, some day (interest) rates will rise back to more normal levels. It would be a good idea to have the level of total debt at a more manageable state.”’
Earlier this month, Statistics Canada reported household debt hit $1.481 trillion during the second quarter of 2010, up from $1.385 trillion during the same period last year.
The Canadian Payroll Association, meanwhile, warned that 59 per cent of Canadians believe they would be in a financial jam if their paycheques were cut or delayed by a week.
“Unless there is a large change in terms of the economy going back into recession, I think the Canadian consumer is more than capable of managing these current debt levels,” McCaughey said.
“But I do think it is time, and we are already seeing this, for some pause in terms of the build up in borrowing. And I think that’s prudent because rates won’t always be this low.”
The Bank of Canada has hiked its trendsetting interest rate three times since June. That overnight rate, now sitting at 1 per cent, influences consumer borrowing costs on a slew of floating-rate loans such as variable-rate mortgages.
Réjean Robitaille, chief executive officer of Laurentian Bank of Canada, said the new harmonized sales tax that took effect in Ontario and British Columbia this summer has also curbed demand for mortgages.
“A lot people, particularly outside of Quebec, accelerated their decision to buy a home because of the implementation of the HST,” Robitaille said. “So, that probably explains why in the first six months of this year, the (loan) volume was very impressive.”
Tim Hockey, head of Canadian banking for TD Bank Financial Group, said the lending slowdown would likely pinch overall revenue growth.
“(We’re) not sure yet whether at some point there won’t be some deleveraging in the Canadian consumer household debt rates, if you will,” said Hockey. “But that is something we worry about a little bit.”
He also suggested there is some evidence Canadians are becoming wary about applying for new credit cards via those once ubiquitous industry “mail drop” applications. Said Hockey: “The response rates to those mail drops have plummeted.”
Separately Wednesday, a new economics report by CIBC World Markets suggested that Canada’s economy has “muted growth prospects through 2011,” which will make consumers more cautious about using credit.
“Together, the negative wealth effect from housing and reduced use of credit will pare enough purchasing power from consumers to limit growth in consumer spending to under 3 per cent next year,” the report said.
Tuesday, September 28, 2010
Monday, September 27, 2010
Canadians precariously close to financial instability, study finds
Emily Mathieu - Business Reporter
Canadians are spending too much too fast, living paycheque to paycheque and have little, if anything, tucked away in case of emergency.
The verdict on how poorly we manage our personal finances comes courtesy of a cluster of recent studies, all examining how much Canadians spend and how little we actually save.
“There is a bubble that will burst eventually,” said Laurie Campbell, executive director of Credit Canada commenting on a report that six out of 10 Canadians are living paycheque to paycheque. Most are one pay slip away from financial instability, the study showed.
“Canadians are not doing a great job right now,’ said Campbell. “Everyone needs to take responsibility for this.”
On Monday, the Canadian Payroll Association reported that of 2,700 Canadians surveyed 59 per cent are stretching their pay to the absolute limit and expect they would be in financial difficulty if their pay was cut or delayed by one week. That figure is unchanged from last year.
The grim news on personal budgets came the same day Statistics Canada reported that as of June 2010 Canadians had racked up $1.48 trillion in household debt, up 6.9 per cent or an increase of $96 billion from the same time last year.
Dealing with that mounting debt is top of mind, even if the proposed solution is a bit on the whimsical side, the CPA study showed.
“When we asked people what they would do if they won one million dollars, 81 per cent said they would pay off their debt,” said CPA chairman, Cindy Forget.
“Last year the majority said they would put money away for retirement.”
The numbers for savings rates were not encouraging. Forty per cent of respondents said they were not trying to save anything. Forty seven per cent, almost half the working population of Canada, were only saving five per cent or less of their paycheques.
Not only are Canadians failing to stretch our bi-weekly or weekly paycheque, but we share lingering concerns over job security in Ontario and across the rest of the country.
In Ontario, three out of four workers do not believe they could find a job with similar pay if they lost their current position, slightly higher than the national average.
Optimism when it comes to economic and employment prospects is also waning, the study showed.
In 2010 about six out of 10 Canadians said they felt the economy will improve throughout the coming year, compared to seven out of 10 Canadians expressing optimism for the future in 2009.
Campbell said what caused her great concern was the immediate and record number of bankruptcies that took place immediately after Prime Minister Stephen Harper officially declared the recession in 2008. Typically bankruptcies take place at the tale end of the recession after a lengthy period of financial hardship, or are a lagging indicator, said Campbell.
“The reason they were not a lagging indicator in this recession is because people were already over indebted. People are already living on the edge.”
While those figures have slowed down the fact that Canadians are racking up record debt with little savings or safety net “spells an opportunity for another disaster,” said Campbell.
Concerns about the future of the country’s economy have not dissuaded Canadians from taking on debt.
In May, the Certified General Accountants Association of Canada reported that six out of 10 Canadians said even though their debt load was rising they felt they could manage it or take on more.
“This report is another indication of Canadians’ readiness to consume today and pay later,” said Anthony Ariganello, president and chief executive officer, CGA-Canada, in a release. “The concern is do they understand the full cost of paying later?”
That same study showed that if mortgage rates increase by two percentage points, middle to high incomes families would have to cut up to 11 per cent from their extra spending budget to keep up current payments on shelter, taxes, food and transportation.
Canadians are spending too much too fast, living paycheque to paycheque and have little, if anything, tucked away in case of emergency.
The verdict on how poorly we manage our personal finances comes courtesy of a cluster of recent studies, all examining how much Canadians spend and how little we actually save.
“There is a bubble that will burst eventually,” said Laurie Campbell, executive director of Credit Canada commenting on a report that six out of 10 Canadians are living paycheque to paycheque. Most are one pay slip away from financial instability, the study showed.
“Canadians are not doing a great job right now,’ said Campbell. “Everyone needs to take responsibility for this.”
On Monday, the Canadian Payroll Association reported that of 2,700 Canadians surveyed 59 per cent are stretching their pay to the absolute limit and expect they would be in financial difficulty if their pay was cut or delayed by one week. That figure is unchanged from last year.
The grim news on personal budgets came the same day Statistics Canada reported that as of June 2010 Canadians had racked up $1.48 trillion in household debt, up 6.9 per cent or an increase of $96 billion from the same time last year.
Dealing with that mounting debt is top of mind, even if the proposed solution is a bit on the whimsical side, the CPA study showed.
“When we asked people what they would do if they won one million dollars, 81 per cent said they would pay off their debt,” said CPA chairman, Cindy Forget.
“Last year the majority said they would put money away for retirement.”
The numbers for savings rates were not encouraging. Forty per cent of respondents said they were not trying to save anything. Forty seven per cent, almost half the working population of Canada, were only saving five per cent or less of their paycheques.
Not only are Canadians failing to stretch our bi-weekly or weekly paycheque, but we share lingering concerns over job security in Ontario and across the rest of the country.
In Ontario, three out of four workers do not believe they could find a job with similar pay if they lost their current position, slightly higher than the national average.
Optimism when it comes to economic and employment prospects is also waning, the study showed.
In 2010 about six out of 10 Canadians said they felt the economy will improve throughout the coming year, compared to seven out of 10 Canadians expressing optimism for the future in 2009.
Campbell said what caused her great concern was the immediate and record number of bankruptcies that took place immediately after Prime Minister Stephen Harper officially declared the recession in 2008. Typically bankruptcies take place at the tale end of the recession after a lengthy period of financial hardship, or are a lagging indicator, said Campbell.
“The reason they were not a lagging indicator in this recession is because people were already over indebted. People are already living on the edge.”
While those figures have slowed down the fact that Canadians are racking up record debt with little savings or safety net “spells an opportunity for another disaster,” said Campbell.
Concerns about the future of the country’s economy have not dissuaded Canadians from taking on debt.
In May, the Certified General Accountants Association of Canada reported that six out of 10 Canadians said even though their debt load was rising they felt they could manage it or take on more.
“This report is another indication of Canadians’ readiness to consume today and pay later,” said Anthony Ariganello, president and chief executive officer, CGA-Canada, in a release. “The concern is do they understand the full cost of paying later?”
That same study showed that if mortgage rates increase by two percentage points, middle to high incomes families would have to cut up to 11 per cent from their extra spending budget to keep up current payments on shelter, taxes, food and transportation.
Friday, September 17, 2010
Can you afford to take a year off?
Helen Morris, National Post
As the summer draws to a close and our vacation away from the office feels like a distant memory, thoughts may turn to taking a longer sabbatical. Perhaps you have always had a burning desire to write a novel. In order to determine whether you can afford to take a year off to write the next War and Peace, you will need to take a good look at your finances-- and that includes the mortgage.
"Sit down with a mortgage advisor, a financial planner and really take a look at how you're going to go about taking a financial holiday and ask yourself if you can truly afford it, then figure out a strategy," says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto. You might have several options, "whether it be that you have saved [for] payments, or whether you need to refinance your mortgage to have some money put aside for those rainy days."
Depending on the level of equity in your home and your own credit record, some lenders may allow you to take a holiday from payments.
"The payment holiday is going to be based on the parameters of your mortgage and your credit quality. If you happen to have a 30% loan to value and you've decided you want to take a year off ... your mortgage lender could probably be convinced to capitalize the payments for that 12-month period without any real risk to them," says Peter Veselinovich, vice-president of banking and mortgage operations at Investors Group. "The interest amount would be added to principal on a monthly basis, as opposed to you actually making a payment, so your principal balance on your mortgage would go up over that period of time."
Your cash-flow situation improves but the cost will be higher interest payments over the lifetime of the mortgage.
If a complete payment holiday is not an option, there are ways to plan ahead for reducing mortgage payments.
"If you've got a mortgage and it's registered for a 35-year amortization, say, your payments are $1,000 and you could afford $1,600, pay that," says Paula Roberts, a mortgage broker for Mortgage Intelligence in Unionville. "The extra money will go right towards principal and reducing the amortization. [If ] all of a sudden you need to take some time off, you can reduce your payments to the $1,000 [without re-negotiating the loan]" she says. "You're not in arrears and all you've done is started from a 35-year amortization, gone to a 25-year amortization, and then you just go back to a 35-year amortization."
Ms. Roberts says some lenders will allow you to attach a line of credit to your mortgage, which you can use to finance payments during your sabbatical.
However, Mr. Veselinovich cautions that a line of credit may not provide the best interest rate and, during and after the sabbatical, you will now have additional payments on top of your regular outgoings.
Income from other investments could also help to fund a sabbatical.
"This is part of an overall planning scenario that takes into account that [the sabbatical] is one of the goals you wanted to achieve," Mr. Veselinovich says.
If you take funds from your RSPs while you have no other employment income, you will pay a lower tax rate.
"If you were at a marginal 42% tax rate and it drops to 25%, that makes a big difference in how much you keep in your pocket," Mr. Veselinovich says. "But you're stealing from Peter to pay Paul, if this was your retirement [fund]." Have a post-sabbatical plan in place, he says, to replace the retirement funds.
"You'll get yourself back on track and have had the opportunity to take that sabbatical," says Mr. Veselinovich.
As the summer draws to a close and our vacation away from the office feels like a distant memory, thoughts may turn to taking a longer sabbatical. Perhaps you have always had a burning desire to write a novel. In order to determine whether you can afford to take a year off to write the next War and Peace, you will need to take a good look at your finances-- and that includes the mortgage.
"Sit down with a mortgage advisor, a financial planner and really take a look at how you're going to go about taking a financial holiday and ask yourself if you can truly afford it, then figure out a strategy," says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto. You might have several options, "whether it be that you have saved [for] payments, or whether you need to refinance your mortgage to have some money put aside for those rainy days."
Depending on the level of equity in your home and your own credit record, some lenders may allow you to take a holiday from payments.
"The payment holiday is going to be based on the parameters of your mortgage and your credit quality. If you happen to have a 30% loan to value and you've decided you want to take a year off ... your mortgage lender could probably be convinced to capitalize the payments for that 12-month period without any real risk to them," says Peter Veselinovich, vice-president of banking and mortgage operations at Investors Group. "The interest amount would be added to principal on a monthly basis, as opposed to you actually making a payment, so your principal balance on your mortgage would go up over that period of time."
Your cash-flow situation improves but the cost will be higher interest payments over the lifetime of the mortgage.
If a complete payment holiday is not an option, there are ways to plan ahead for reducing mortgage payments.
"If you've got a mortgage and it's registered for a 35-year amortization, say, your payments are $1,000 and you could afford $1,600, pay that," says Paula Roberts, a mortgage broker for Mortgage Intelligence in Unionville. "The extra money will go right towards principal and reducing the amortization. [If ] all of a sudden you need to take some time off, you can reduce your payments to the $1,000 [without re-negotiating the loan]" she says. "You're not in arrears and all you've done is started from a 35-year amortization, gone to a 25-year amortization, and then you just go back to a 35-year amortization."
Ms. Roberts says some lenders will allow you to attach a line of credit to your mortgage, which you can use to finance payments during your sabbatical.
However, Mr. Veselinovich cautions that a line of credit may not provide the best interest rate and, during and after the sabbatical, you will now have additional payments on top of your regular outgoings.
Income from other investments could also help to fund a sabbatical.
"This is part of an overall planning scenario that takes into account that [the sabbatical] is one of the goals you wanted to achieve," Mr. Veselinovich says.
If you take funds from your RSPs while you have no other employment income, you will pay a lower tax rate.
"If you were at a marginal 42% tax rate and it drops to 25%, that makes a big difference in how much you keep in your pocket," Mr. Veselinovich says. "But you're stealing from Peter to pay Paul, if this was your retirement [fund]." Have a post-sabbatical plan in place, he says, to replace the retirement funds.
"You'll get yourself back on track and have had the opportunity to take that sabbatical," says Mr. Veselinovich.
Tuesday, September 14, 2010
Bank of Canada hikes rates, sees slower recovery
(Reuters)By Louise Egan
OTTAWA (Reuters) - The Bank of Canada raised its benchmark interest rate for a third consecutive time on Wednesday and sounded surprisingly hawkish despite predicting a more gradual than expected economic recovery.
The central bank nudged its overnight rate target up 25 basis points to 1 percent and, contrary to most economists' expectations, did not signal a pause for its next decision in October. It said rates remained "exceptionally stimulative" but kept all options open due to doubts about the U.S. and global recoveries.
"Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook," it said in a statement.
The Canadian dollar jumped to a session high against the U.S. currency, touching C$1.0369 to the U.S. dollar, or 96.44 U.S. cents from C$1.0486 to the U.S. dollar just before the announcement.
Short-term money market rates and bond yields also jumped. The yield on the rate sensitive two-year Canadian government bond rose to 1.377 percent from 1.266 percent just before the news.
"Generally it's a very upbeat statement, it's a little more hawkish than I anticipated," said Derek Burleton, Deputy Chief Economist at TD Bank Financial Group. "This will cast some uncertainty about whether the bank will pause at the next fixed announcement date."
The Bank of Canada has raced ahead of its Group of Seven peers in raising borrowing costs after the global financial crisis. It lifted its policy rate on June 1 from an all-time low of 0.25 percent and raised rates again on July 20.
The U.S. Federal Reserve, by contrast, has raised the prospect of further easing and counterparts in Europe and Japan are likewise far from ready to tighten monetary policy.
CLOSE CALL
Markets had seen Wednesday's rate hike as a close call because of rising fears of another U.S. economic downturn. Twenty-five out of 41 forecasters in a Reuters poll had predicted a hike. Most analysts also expected the bank to hold rates steady in October and December and possibly longer as it tracks developments elsewhere.
After the rate announcement, markets were pricing in an about a 68 percent probability the bank would leaves rates unchanged in October based on yields on overnight index swaps, according to a Reuters calculation.
"As it stands right now, our official call was for the Bank to remain on hold for the next few meetings, but that's obviously something we have to review in light of the statement and as economic figures roll in the weeks ahead," said Doug Porter, deputy chief economist at BMO Capital Markets.
The Bank of Canada said the 1 percent rate is "consistent with achieving the 2 percent inflation target in an environment of significant excess supply in Canada."
The language was similar to that used in its last rate announcement on July 20. But the bank omitted any reference to weighing any further rate hikes "against domestic and global economic developments."
U.S. TO BLAME
It acknowledged that the economic recovery was losing slightly more steam than it had anticipated just six weeks ago. Second quarter growth disappointed at a 2 percent annual rate versus the bank's 3 percent projection. The bank will revise its official forecasts next month.
It blamed the weaker economy in the United States, which buys three-quarters of Canadian exports, for the tepid rebound in Canada. High U.S. unemployment is holding back spending by individuals and businesses, it said.
While exporters may take a beating, the bank sounded upbeat on domestic consumer spending and business investment.
"Going forward, consumption growth is expected to remain solid and business investment to rise strongly," it said.
Most recent U.S. data have dampened fears of a double-dip recession but the recovery there is still wobbly, making it uncertain whether the U.S. Federal Reserve will see fit to take further action to drive down already rock-bottom borrowing costs.
The European Central Bank kept euro zone rates at a record low of 1 percent for the 16th month running last week and extended its program offering liquidity to banks.
The Bank of Japan stood pat on monetary policy on Tuesday but set the stage for possible easing next month.
Canada's commodity exporting economy has been more akin to that of Australia, which hiked rates 150 basis points between October and May but has since moved to the sidelines.
OTTAWA (Reuters) - The Bank of Canada raised its benchmark interest rate for a third consecutive time on Wednesday and sounded surprisingly hawkish despite predicting a more gradual than expected economic recovery.
The central bank nudged its overnight rate target up 25 basis points to 1 percent and, contrary to most economists' expectations, did not signal a pause for its next decision in October. It said rates remained "exceptionally stimulative" but kept all options open due to doubts about the U.S. and global recoveries.
"Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook," it said in a statement.
The Canadian dollar jumped to a session high against the U.S. currency, touching C$1.0369 to the U.S. dollar, or 96.44 U.S. cents from C$1.0486 to the U.S. dollar just before the announcement.
Short-term money market rates and bond yields also jumped. The yield on the rate sensitive two-year Canadian government bond rose to 1.377 percent from 1.266 percent just before the news.
"Generally it's a very upbeat statement, it's a little more hawkish than I anticipated," said Derek Burleton, Deputy Chief Economist at TD Bank Financial Group. "This will cast some uncertainty about whether the bank will pause at the next fixed announcement date."
The Bank of Canada has raced ahead of its Group of Seven peers in raising borrowing costs after the global financial crisis. It lifted its policy rate on June 1 from an all-time low of 0.25 percent and raised rates again on July 20.
The U.S. Federal Reserve, by contrast, has raised the prospect of further easing and counterparts in Europe and Japan are likewise far from ready to tighten monetary policy.
CLOSE CALL
Markets had seen Wednesday's rate hike as a close call because of rising fears of another U.S. economic downturn. Twenty-five out of 41 forecasters in a Reuters poll had predicted a hike. Most analysts also expected the bank to hold rates steady in October and December and possibly longer as it tracks developments elsewhere.
After the rate announcement, markets were pricing in an about a 68 percent probability the bank would leaves rates unchanged in October based on yields on overnight index swaps, according to a Reuters calculation.
"As it stands right now, our official call was for the Bank to remain on hold for the next few meetings, but that's obviously something we have to review in light of the statement and as economic figures roll in the weeks ahead," said Doug Porter, deputy chief economist at BMO Capital Markets.
The Bank of Canada said the 1 percent rate is "consistent with achieving the 2 percent inflation target in an environment of significant excess supply in Canada."
The language was similar to that used in its last rate announcement on July 20. But the bank omitted any reference to weighing any further rate hikes "against domestic and global economic developments."
U.S. TO BLAME
It acknowledged that the economic recovery was losing slightly more steam than it had anticipated just six weeks ago. Second quarter growth disappointed at a 2 percent annual rate versus the bank's 3 percent projection. The bank will revise its official forecasts next month.
It blamed the weaker economy in the United States, which buys three-quarters of Canadian exports, for the tepid rebound in Canada. High U.S. unemployment is holding back spending by individuals and businesses, it said.
While exporters may take a beating, the bank sounded upbeat on domestic consumer spending and business investment.
"Going forward, consumption growth is expected to remain solid and business investment to rise strongly," it said.
Most recent U.S. data have dampened fears of a double-dip recession but the recovery there is still wobbly, making it uncertain whether the U.S. Federal Reserve will see fit to take further action to drive down already rock-bottom borrowing costs.
The European Central Bank kept euro zone rates at a record low of 1 percent for the 16th month running last week and extended its program offering liquidity to banks.
The Bank of Japan stood pat on monetary policy on Tuesday but set the stage for possible easing next month.
Canada's commodity exporting economy has been more akin to that of Australia, which hiked rates 150 basis points between October and May but has since moved to the sidelines.
Wednesday, September 8, 2010
10 easy ways to build a credit history
by Gail Vaz-Oxlade, for Yahoo! Canada Finance
I am constantly astounded at the number of people I meet who are in a bind because they have no credit history and can’t borrow money. This is something we used to associate with older, widowed women who have been cared for by loving, controlling spouses. But that’s just part of the story. Not having a credit history isn’t the domain on slightly out-of-touch women; there are men out there who haven’t got a clue because their wives do EVERYTHING. And it isn’t the exclusive territory of our elders; there are young, professionals who haven’t bothered to establish their own credit identities.
Everyone needs to have the ability to borrow money. That’s true whether you’ve just found yourself in the new role of single parent without an emergency fund or you’re a young adult starting out.
1. Get a Secured Credit Card. The fastest, cheapest and easiest way to establish a credit history is with a secured credit card. Since there’s no risk to the lender because you’ve put up the cash to cover your balance, secured cards are great for new borrowers or people trying to re-establish credit after a bankruptcy.
Lenders usually want twice the credit card limit. So if you want a $500 credit limit, you’ll have to ante up $1,000. Once you’ve established your ability to manage the card – anywhere from six months to a year – you can ask for the security requirement to be dropped and your deposit returned.
2. Get a gas or department store card. Gas or department store credit cards are often easier to get and can be good ways to establish credit. You must pay your bills in full and on time because the interest rates on these cards are often astronomical. But as long as you don’t miss a payment – which you never will, right? – it makes no difference what the interest rate is. Use these cards wisely and they can be a great toe-hold.
3. Borrow for an RRSP. Borrowing money to contribute to an RRSP is a great way to establish a credit history. While the RRSP cannot officially be used as collateral for the loan, lenders know where to find their money so approvals come more easily and the interest rate won’t be horrendous. Make sure you only borrow as much as you can afford to repay in six months. How much you borrow doesn’t mean much; repaying the loan quickly without a misstep does. Don’t let anyone talk you into more. Once the six months are up, use the amount you were using to repay the loan as your month retirement savings contribution. Now you’re building up your assets, which will be good for your credit history too. 4. Get a co-signer. While I’m not a big proponent of signing on for other people’s debt, if you can find someone who loves you enough to put their credit history at risk for you, do it. Make sure the loan history is being reported in your name and not the co-signer’s.
5. Put up collateral. If you have someone a lender can sell to get back his money, you’re more likely to get credit. Collateral comes in all sorts of forms: from the car you’re buying to those GICs you’ve got stashed away, if you have something a lender values, you’re in the money.
Of course, getting credit is only the first step to building a credit history. How you use that credit will be the real test.
1. Pay all your bills on time. Yes, including your cell phone bill, since some cell providers report to the credit bureau. Setting up pre-authorized payments is a great way to ensure payments are made on time.
2. Avoid applying for credit too often. Since repeated requests for credit may be interpreted as a sign that you’re in trouble and need a way to cover your butt, this will adversely affect your credit score.
3. Charge regularly and pay off in full. Responsible on-going use of credit will produce a good credit rating. Just having your card sit in your wallet does nothing to add positively to your record.
4. Don’t over-expose yourself. Having multiple forms of credit with small balances can add up quickly and become unmanageable.
5. Don’t use credit to pay off credit. Taking cash advances on one card to make payments on another means you’re in over your head. Cut back on your spending, pay off your debt and get back to the business of using credit to keep your record active and healthy, not to spend money you haven’t yet earned.
I am constantly astounded at the number of people I meet who are in a bind because they have no credit history and can’t borrow money. This is something we used to associate with older, widowed women who have been cared for by loving, controlling spouses. But that’s just part of the story. Not having a credit history isn’t the domain on slightly out-of-touch women; there are men out there who haven’t got a clue because their wives do EVERYTHING. And it isn’t the exclusive territory of our elders; there are young, professionals who haven’t bothered to establish their own credit identities.
Everyone needs to have the ability to borrow money. That’s true whether you’ve just found yourself in the new role of single parent without an emergency fund or you’re a young adult starting out.
1. Get a Secured Credit Card. The fastest, cheapest and easiest way to establish a credit history is with a secured credit card. Since there’s no risk to the lender because you’ve put up the cash to cover your balance, secured cards are great for new borrowers or people trying to re-establish credit after a bankruptcy.
Lenders usually want twice the credit card limit. So if you want a $500 credit limit, you’ll have to ante up $1,000. Once you’ve established your ability to manage the card – anywhere from six months to a year – you can ask for the security requirement to be dropped and your deposit returned.
2. Get a gas or department store card. Gas or department store credit cards are often easier to get and can be good ways to establish credit. You must pay your bills in full and on time because the interest rates on these cards are often astronomical. But as long as you don’t miss a payment – which you never will, right? – it makes no difference what the interest rate is. Use these cards wisely and they can be a great toe-hold.
3. Borrow for an RRSP. Borrowing money to contribute to an RRSP is a great way to establish a credit history. While the RRSP cannot officially be used as collateral for the loan, lenders know where to find their money so approvals come more easily and the interest rate won’t be horrendous. Make sure you only borrow as much as you can afford to repay in six months. How much you borrow doesn’t mean much; repaying the loan quickly without a misstep does. Don’t let anyone talk you into more. Once the six months are up, use the amount you were using to repay the loan as your month retirement savings contribution. Now you’re building up your assets, which will be good for your credit history too. 4. Get a co-signer. While I’m not a big proponent of signing on for other people’s debt, if you can find someone who loves you enough to put their credit history at risk for you, do it. Make sure the loan history is being reported in your name and not the co-signer’s.
5. Put up collateral. If you have someone a lender can sell to get back his money, you’re more likely to get credit. Collateral comes in all sorts of forms: from the car you’re buying to those GICs you’ve got stashed away, if you have something a lender values, you’re in the money.
Of course, getting credit is only the first step to building a credit history. How you use that credit will be the real test.
1. Pay all your bills on time. Yes, including your cell phone bill, since some cell providers report to the credit bureau. Setting up pre-authorized payments is a great way to ensure payments are made on time.
2. Avoid applying for credit too often. Since repeated requests for credit may be interpreted as a sign that you’re in trouble and need a way to cover your butt, this will adversely affect your credit score.
3. Charge regularly and pay off in full. Responsible on-going use of credit will produce a good credit rating. Just having your card sit in your wallet does nothing to add positively to your record.
4. Don’t over-expose yourself. Having multiple forms of credit with small balances can add up quickly and become unmanageable.
5. Don’t use credit to pay off credit. Taking cash advances on one card to make payments on another means you’re in over your head. Cut back on your spending, pay off your debt and get back to the business of using credit to keep your record active and healthy, not to spend money you haven’t yet earned.
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