Sunday, April 29, 2007

Managing Credit

Part of money management is using credit, wihich is part of everyon'es financial reality. You need credit to buy a home, car, appliance, take a holiday or invest. If credit is not handled properly it becomes a liability. If you don't pay off the balance every month, you will be charged interest on any outstanding balance we if it gets out of hand can be overwhelming.

Applying for Credit:

There are some basic guidelines that everyone must follow in order to get a credit card, car loan, mortgage or line of credit:

  • Know your income and expenses ahead of time and have a detailed statement of your networth.
  • Make sure you have a good credit rating.
  • Give yourself some time to apply before you actually need the credit so you can shop around for the best rates and conditions for you.
  • Read and understand credit application forms before you sign them. Don't be afraid to ask questions when you don't understand, there are no stupid questions.
  • Provide copies of your last T-4 slip or a letter from your employer stating your annual earnings.
  • Give details of any assets and their values.
  • Give details of expenses and money owed. Provide a copy of your annual mortgage statement, if you have a home, and information on loan and credit balances.
  • Match your borrowing to your purpose. Use short term credit for things you can pay off right away such as consumer goods and long-term credit for a home. Don't use a more expensive form of credit than is necessary.
  • Be realistic about what you want to borrow and discuss alternatives if the lender can't fully accommodate you.

Security for Loans: Sometimes you may need to offer tangible assets (real estate, stocks or bonds) as collateral to get credit. This allows you to borrow more and at possibly a lower interest rate. However, you have to be careful because defaulting on a loan like this means that the bank can take whatever you put up as collateral.

Paying for Credit: Credit is access to another's money and interest is the cost of borrowing that money. Interest rates on loans can be fixed or variable:

  • Fixed rates are those that stay the same for the duration of the loan
  • Variable rates are those that change based on market conditions

It is important to read a loan agreement because it will state how often, when, and how much rates may change. Variable rates are tied to an indicator such as the bank's prime rate, so watch this rate. The lower the interest rate the more principal is being paid down, the higher the interest the more interest is being paid and the lower the principal. You have to remember that interest rates fluctuate, they go up and down based on economic conditions such as inflation. If you borrow when interest rates are low make sure you can afford the debt even if interest rates rise.

What interest rate you get depends on many factors including the risk involved. Borrowing will cost you less in the long run if you make bigger payments or make payments more often.

Smart Credit Use: Having credit comes with the responsibility of thinking how you will make it work for you. Here are a few rules to help you reach your financial goals.

  • Watch impulse buying. Would you still buy the item if you were paying cash?
  • Credit - still money, compare prices and value when you are shopping
  • Don't have or use too many credit cards
  • Keep track of all of your purchases and compare your receipts agains your monthly credit card statements
  • When buying a car, look at loan prices. The bigger a downpayment you make the better. Also, weigh the cost of borrowing against using some savings. If you have money put away that is making hardly any interest, use that money so that you don't wrack up unecessary debt. Be aware though that this doesn't mean use all of your savings, you should always hav a financial cushion.
  • For Canadians, the biggest purchase is a home. In a competitive mortgage market it pays to shop around for the best terms and interest rates. Also, explore the many ways you can pay down your mortgage faster -lump sum payments at renewal, doubling up on paymets or shortening the term of the mortgage.
  • Be careful of co-signing or guaranteeing a loan for some one else, you could end up paying for their loan.
  • Pay of your credit card balance every month.

Build a Good Credit Rating:

  • Pay your bills as soon as they come in, especiall credit cards
  • Borrow only what you need and can afford
  • Pay of loans on time and as quickly as possible

Checking your Credit History:

  • You can find your local consumer reporting agency in the yellow pages to find out how you can obtain a copy of your credit file. As this is sensitive information remember to provide appropriate identification.
  • Upon receipt of your credit file request, it will take two to three weeks to be mailed to you free of charge.
  • If you notice any errors contact the reporting agency who will handle it and it will be changed immediately.