For Cassandra

The only man who sticks closer to you than a friend in adversity is a Creditor” – Unknown

Dear Cassandra;

First off, congrats to you on being a mother of 3! That itself is a huge accomplishment and one of the hardest jobs in the world. When you have kids, paying down debt is a huge task which can take years.

I’ll break it down for you like this because quite honestly, people don’t understand how credit history and scoring works.

Metaphorically speaking, credit score/history is like the foundation of a house.

That first layer needs to be the strongest as you build up.

Throughout life you “build up” your credit just like a house by using various financial products. The first product is usually a credit card and banks start you off with a small, unsecured limit as a test to see how you will manage more complex credit in your lifetime.

Usually in our life stages we take on: a Credit Card -> Car Loan -> Unsecured Line of Credit -> Mortgage

Your first credit card opens the door to building your history but one little”crack” can lead to some problems.

If you miss a minimum payment, just that small little amount and you are hit with one of these:

  • 30 days (r2)
  • 60 days (r3)
  • 90 days late (r4)

For each time you are late under these timelines, it is reflected on your bureau which then brings down your score. Each month, your reporting reflects your repayment and if it is positive, you may see small increases in your credit score or it will remain the same. That’s why it takes so LONG….just like it’s easier to rack up debt than it is to pay it off.

Here’s the thing…..

Banks know people make mistakes which is why the R rating scores are applied (read more about those Here.

Generally speaking, a score of 650 or higher is ideal for most SECURED credit products. It is easier to get SECURED (Mortgage) credit vs. UNSECURED (Line of credit).

Banks do not just rely on your score but also use the 5 C’s of Credit: Character, Capacity, Collateral, Capital and Conditions to assess your credit worthiness aside from just a score so consider that as well.

A few late payments are not going to destroy your credit forever but it will affect how much interest you will pay and how much you can borrow.

The only way to repair your credit rating and score is TIME. If you pay your minimum payments and keep your revolving balance at least 10 percent below your limit, you will see improvements throughout the year.

Equifax and Transunion are the two leading credit reporters in Canada. They report monthly on your history.

Throughout my career as a Financial Planner/Advisor, one of the biggest mistakes made while trying to repair credit and pay off debt was actually paying it down TOO aggressively which leaves yourself short each month so you dip back into your credit.

Without having equity in a home, it is VERY difficult to consolidate debts with a bank because they do not want to take on unsecured debts. It’s just not profitable for them in the way you think it would be.

I highly recommend reading about The Snowball Effect by Dave Ramsey. His tips for debt reduction and elimination are highly effective and designed for those who have no equity or assets to borrow against.

Q: Should you save or pay down debt?

A: Both. You need emergency savings and you need to pay down your debts but both must be done slowly otherwise you will end up in a worse position. This is where a budget comes in to play.

Q: How do you set a budget and stick to it?

A: Budgets can be very hard to stick by considering cash flows can be unpredictable due to bills, income, etc.

I highly recommend doing these things:

1. Keep a separate account for your Fixed and Variable EXPENSES where a set amount goes in each month and you never touch it otherwise.

2. For your kids; invest in “memories not memorabilia” which for me means rather than buying them a toy or something for a reward, go do something with them which is usually free or cheap and doesn’t end up tossed aside after an hour. Memories last forever and strengthens your bond.

3. When possible, have your employer direct a small amount to a savings plan so you don’t even see that amount for anything but savings.

4. Keep your own bank account or ONE credit card with a small limit for your OWN spending

5. Have the higher earning spouse make RRSP contributions and the lesser earning spouse pay the childcare expenses. This will pay off big time when you do your taxes.

6. If you are finding it hard to balance your budget, it may be an income issue rather than a spending issue.

7. Plan your grocery shops and meal planning. We are big on leftovers here and rarely eat out unless it’s a special occasion.

8. Evaluate what you really need and what you don’t. Like I had 5 black tee-shirts at one point….didn’t need 5!

9. Sign up for Equal billing on your utilities to avoid surprises each month.

10. Maintain your car with oil changes and fill up on gas when you hit half a tank. This has been life changing for me 😄

I recommend doing it like this where you take your after tax income and apply it to these three areas:

Top Priority: < strong>FIXED EXPENSES: rent, mortgage, insurance,property taxes, utilities, food, child care, debt repayments.< strong>Second Priority: < strong>VARIABLE EXPENSES: gifts, cell phones, internet, TV, household items like soap, detergent, etc.< strong>After the first two expense categories are balanced, anything left over would go to:< strong>DISCRETIONARY EXPENSES: anything you don’t need but would like to do/have. <<<<<<
om offers a free tool to help you achieve some of your goals and I highly recommend using it.<<<<<<
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