Debt-Free Forever
Page 9
While it can be pretty dramatic 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 scissors!
CHECK YOUR CREDIT HISTORY
Whether you pull a copy of your credit report to verify a closed account or to identify areas in your history that may be causing problems, everyone should check their credit report at least once a year. Your credit history is recorded in your credit report maintained by Canada’s two major credit-reporting agencies: Equifax Canada and TransUnion Canada.
A credit report is a “snapshot” of your credit history and is the primary tool lenders use to decide whether to give you credit. Your credit score is a judgment about your financial health. It indicates the risk you represent for lenders, compared with other consumers. Most credit-reporting agencies use a scale from 300 to 900. The higher your score, the lower the risk for the lender.
One way credit-reporting agencies report on your credit history is by using a scale of 1 to 9. A rating of 1 means you pay your bills within 30 days of the due date. A rating of 9 means that you never pay your bills or that you have made a consumer debt repayment proposal to the lender. A letter will also appear in front of the number: for example, I2, 02, R2. The letter stands for the type of credit you are using.
• I: instalment loan, such as for a car loan, where you borrow money once and repay it in fixed amounts, on a regular basis, for a specific period of time until the loan is paid off.
• O: open credit such as a line of credit, where you borrow money, as needed, up to a certain limit and the total balance is due at the end of each period. Student loans can also fall into this category because the money may not be owing until you are out of school.
• R: revolving credit, on which you make regular payments in varying amounts depending on the balance of your account, and can then borrow more money up to your credit limit. Credit cards are revolving credit and R ratings are most commonly used.
GAIL’S TIPS
Accumulating too much revolving credit—lines of credit or credit cards—makes lenders nervous because they know that you can access that credit whenever you want. If you lose your job, hit a rough patch at work, split up with your spouse, or just go nuts shopping your little heart out, all that revolving credit is yours for the using. So they treat it as if you’ve already used the maximum when they’re working out whether to let you borrow more money. That can be a big problem when you really need to borrow for something like a car or a house.
If you always pay on time, your account will be coded an R1. If an amount was written off because you never paid it back, it will be coded R9. Here are the ratings most often used.
• R00: Too new to rate; approved but not used.
• R1: Pays (or paid) within 30 days of payment due date or not more than one payment past due.
• R2: Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due.
• R3: Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due.
• R4: Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due.
• R5: Account is at least 120 days overdue, but is not yet rated 9.
• R6: This rating does not exist.
• R7: Making regular payments through a special arrangement to settle debts.
• R8: Repossession (voluntary or involuntary return of merchandise).
• R9: Bad debt; placed for collection; moved without giving a new address; or bankruptcy.
While the R ratings let lenders see just how good or bad you’ve been with your credit from one month to the next, your credit score takes your history into account along with a number of other factors, and we’ll look at these in more detail in Chapter 12.
BANISH DIFFICULT DEBT
Getting Out from under a pay-Advance Loan
Whether you did it as an act of desperation or you were just dumber than a sack of hammers, your decision to go to a pay-advance loan store is costing you big-time. Do whatever it takes to get out.
The pay-advance loan biz has been growing by leaps and bounds. They say they’re providing a service: helping people who can’t find help anywhere else. Really? Well, if they’re so interested in “helping” people, then what’s with the fees, the outrageous interest rates, and the never-ending cycle?
Interest is charged from the day you take the loan until the loan, and all the fees, are repaid in full. I have worked with people who have been paying anywhere from 700% to 1,000% when all the fees are added in. Ouch!
Colleen and Jason ended up in a pay-advance store after a slew of unfortunate events. Colleen’s daughter, Lila, stepped on a broken piece of glass and had to be rushed to hospital. Colleen ended up taking five unpaid days off work, setting the couple back $830 that week. Lila also needed a prescription: $76. With no emergency fund and no savings, Jason decided that a pay-advance loan was the only way to make rent. He took a loan for $1,500. In one week, he would be required to repay $1,727.55. He figured he’d get an extra couple of shifts at work to come up with the $227.55 in interest and fees.
But a week later Jason blew a tire on his truck. He realized that if they repaid the $1,727.55, they would have no money for food, so Jason did the repayment and then took a new pay-advance, again borrowing $1,500 to get him to the end of the week. He worked an extra couple of shifts to cover the $227.55 in interest and fees, fully intending to pay the whole thing off.
Since Colleen thought Jason had paid off the pay-advance loan after the first week, she went ahead and used some of the “extra” money in the bank account to get Lila a couple of new things she needed. Colleen got her hair done too. When Jason went to do the pay-advance repayment they were short again. And there were no more overtime shifts at work for the month. Jason paid back the loan by taking yet another advance.
Three months later they were still in the pay-advance cycle, each week paying $227.55 in interest and fees to borrow the $1,500 they needed to keep them afloat.
If Colleen and Jason kept borrowing for the entire year, that pay-advance loan would cost them $11,832.60 in interest. Hey, if you don’t believe me, do the math yourself: $227.55 × 52 = $11,832.60. So, to use $1,500 of someone else’s money for a year, Jason and Colleen were on the hook for almost $12,000 in interest.
So what do you do if you’re in the cycle and are desperate to get out? You’re going to have to suck it up and either
• be short for a couple of weeks while you repay the loan and don’t borrow again, or
• find a way to make more money so you can get the life-sucking debt off your back.
There ain’t no other way, kids. You’ve just got to get serious about getting out of debt and do whatever it takes to break the desperate cycle of borrowing and then borrowing again to make up for the cash flow shortage caused by the outrageous interest and fees charged. It’ll be hard. It’ll hurt. But you’ll have learned an important lesson, and you won’t do that again.
Getting Out from Under Overdraft Protection
This is a product that has been badly named. It should be called Too Lazy to Keep Track Protection because that’s exactly what it is. It’s designed for people who don’t want to have to be bothered with making sure they have enough money before they go shopping. I’ve met hundreds of people who live in overdraft, while their banks giggle with glee.
Overdraft protection is usually sold to people when they open their accounts as a way to ensure that bounced cheques don’t ruin their credit ratings. When you try to spend money you don’t have in your account, the bank covers the withdrawal—be it a cheque, debit, or cash withdrawal—by the amount available in your overdraft protection agreement. The more overdraft protection you have, the more money you can unconsciously spend without having to worry about NSF
charges and bounced payments.
Don’t confuse the kind of overdraft protection you buy, for which you sign an agreement, with what some banks call “bounce protection” or “courtesy overdraft protection,” which they offer to save you from the embarrassment or hassle of a returned cheque or a declined debit card transaction. Unlike regular overdraft, which charges a monthly fee and interest on the amount you’ve “borrowed” (the amount of your overdraft), the fee on “bounce protection” is levied regardless of the amount you go into overdraft for. It can be astronomical when you calculate it as a percentage of the “loan.” One woman wrote me to say that she was appalled when her statement came in and she had more than $160 in bounce fees.
I hate all kinds of overdraft protection. I hate the idea that overdraft protection gives people a licence to ignore their cash management. They can spend whatever they want, whenever they want, because overdraft protection is there to catch them like a safety net.
The banks don’t mind one bit when you go into overdraft, since overdraft interest rates are often well above regular lending rates—one bank I checked charges 21% interest on your outstanding overdraft—and going into overdraft automatically triggers a monthly fee. If, in fact, overdraft is just for the odd slip, as the marketing material says, then why do some banks offer the option of going $5,000 or more into overdraft? That’s not a little slip.
The answer to running into overdraft is not overdraft protection; it is to better manage the cash in your account so you don’t try to spend money you don’t have, bounce cheques, and rack up exorbitant fees.
1.Get yourself a notebook.
2.When you put money in your account, add it to your balance.
3.When you spend money from your account (be it a cheque, bill payment, a debit card transaction, or a cash withdrawal), debit that amount from the balance in your notebook.
4. Keep your eye on your balance.
If you think that sounds like too much work, you’re a dope. You’d work at least this hard to find where gas is selling for a penny less, or where tuna is two for $1.39, or where wings are all-you-can-eat for $3.99. Staying out of overdraft is one of the best deals going.
Getting Out from Under Student Loans
If you went to university or college and borrowed money to get you through, you may still be walking around with student debt as part of your debt portfolio. Often people graduate from school with more debt than they can manage to repay on the incomes they earn from their first jobs. It can get pretty depressing to be five years into your working career and still be paying off your student loans.
Well, you could declare bankruptcy! No, that won’t work. Even if you owe more money than you can afford to repay, you’ll have to suck it up because you’re not allowed to discharge student loan debt through bankruptcy until you’ve been out of school for at least seven years.
Many people don’t realize that the student loan system actually charges more than banks and other lenders for the use of their money for two reasons:
1. No interest accumulates on your student loan debt while you remain in school … so it’s interest-free borrowing until you leave school (to a maximum of seven years).
2. They give you a six-month window during which you do not have to make payments after you’ve left school, so you have some time to find a job. You are, however, charged interest. Believe it or not, more than half of all student loan borrowers don’t know this. Hello! Didn’t you read the fine print?
So why don’t people just consolidate their student debt with a regular lender after school? First, they may not qualify. That’s right, having taken out whopping loans to get a ho-hum degree, which has left you earning $10 an hour, no other lender may consider you a good-enough risk, And while the student loan system is happy if you take forever to repay your debt—the interest clock just keeps ticking—most lenders won’t be happy with you taking 10 years to repay your student loan. If you go to another lender, you had better be dead serious about repaying your loan.
Second, as long as you’re part of the student loan program, you may pay through the nose, but you have options. Canada Student Loans or Integrated Student Loans (offered by Saskatchewan, Ontario, New Brunswick, and Newfoundland and Labrador) will let you
• temporarily take a pass on payments. Unemployed or not earning much money? If you are unable to make payments, you could be eligible for interest relief through which the government will pay the interest on your loans for you.
• decrease your monthly repayment amount by extending the amount of time it will take overall for you to pay off your loan up to 15 years.
• reduce the amount of your student loan up to three times to a maximum of $26,000, if you face exceptional long-term financial difficulties and have been out of school for at least five years.
• eliminate your loan completely if you have a permanent disability—physical or mental—that restricts your ability to perform the daily activities necessary to go to school or work.
There are also several tax relief measures that have been brought in to try to help students deal with the growing debts with which they’re graduating:
• A 17% tax credit on the interest you pay on your student loan each year
• An education claim of $400 per month on your tax form for full-time studies
• A non-refundable textbook tax credit of $65 for each month you’re enrolled in a course that entitles you to a full-time education tax credit
• A full tax exemption for all post-secondary scholarships and bursaries. You’ll still receive a T4A slip, but the amount doesn’t need to be reported on your income tax return.
If you do not make your student loan repayments on time, the government will send your account to collections, you will be badgered, and you’ll end up with a really crappy credit history. You could end up paying more in interest. They will hold your tax refunds. And you could face legal action.
The only way to deal with this is to get yourself on a debt repayment program, find the money, and pay off the loan(s). Your life may suck for a while as you pour all your extra money into getting to debt-free, but it beats the pants off watching your credit history go down the crapper.
YOU CAN DO IT!
You don’t have to live in debt. You can change your life. But you have to really want to. It will be hard. But if you have the gumption, you can do it. I know you can.
The first thing you have to do is take all your credit cards but one (or at most two) and cut them up. Include your department store cards. And unless you’re getting a discount on gas, include your gas cards too.
Remember, cutting up your cards does not cancel your account. It simply removes the ability to use the card—and the temptation to spend money you don’t have.
Next, take the credit card you’ve kept and put it somewhere hard to reach—freeze it, bury it in the fish tank, throw it behind the refrigerator. Now you’re on your way.
GAIL’S TIPS
The best way to use credit cards to your advantage is to use a card with the bells and whistles you like to pay for the necessities of your life, everything from groceries and gas. When you charge something, transfer the same amount of money you spent into a savings account set up explicitly for paying off the card. Come the due date, you can use the money you transferred into your Credit Card Account to pay off the card in full. There ya go: you’ve used and paid off your credit, added to your credit history, and stayed in the black. What a concept!
You’ll have to make a budget, create a debt repayment plan, and rebuild your credit history (if you’ve made it messy). And you should negotiate with your creditors to either consolidate your debt at a lower cost or reduce the amount of interest you’re paying on your various forms of credit.
Most important, you have to stop shopping. Make a promise to yourself that you won’t buy another unessential thing until you’re out of debt. If you must shop, it’s got to be a bargain. I don’t want to hear the yada yada on quality versus
price. Bargain shopping doesn’t mean buying crap. It means buying quality at the best price going. And it means only buying what you need.
As much as you might think you could never survive without that coffee in the morning or that glass of wine in the evening, I’m here to tell you that you can. If you’ve got so much as a dollar of debt, you’ve got to put the brakes on the “nice to haves” until you’re out of the hole. Debt-freedom brings its own intoxication. There’s nothing like the feeling of being free and clear of all financial obligations. Take a sip. It’s a taste to which you’ll enjoy becoming addicted. Cin cin!
PART THREE
CHANGE YOUR HABITS
6
MAKE MORE MONEY
You’ve done up a budget. You’ve created a debt repayment plan. You’ve set some goals for what you want to achieve. All you need now is money. It doesn’t matter how much you trim, how much you plan, how much you tweak, there’s just not enough moolah to go around. Maybe you just don’t make enough money.
If you are struggling to make ends meet and are working a 37.5-hour workweek, perhaps you’re just not working hard enough. And if you’re digging a helluva hole using credit to fill the gaps in your budget, maybe it’s time to look at what you can do to make more money!
Some people don’t equate how hard they work with how much money they have. And so when I tell people they have to find a way to make more money, they balk. They are outraged that they’ll need to spend more time with their noses to the grindstone.
Now, I’m not one for exchanging all of one’s life energy for money or stuff. Quite the contrary. But if you aren’t making it to the end of the month before you get to the end of the money, and you’ve already trimmed your expenses to the bare bone, the only solution left is to make more money.