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Credit is the new reality, cash is no longer king Add to ...

The following excerpt is from Chapter 1 of The Money Book for Everyone Else by Kelley Keehn

Credit is the New Reality - Cash is No Longer King

I DON'T MAKE THE RULES - I JUST EXPLAIN THEM

The signs are everywhere - literally. Many merchants across Canada display signs apologizing that they can't accept $50 or $100 bills. In the spring of 2010, Air Canada officially announced that it would no long accept cash as payment for onboard purchases, only major credit cards. I was surprised to discover which cards are not classified as "major."

Recently, I was checking in at Toronto's Pearson airport and ran into a former colleague at the self-serve kiosk. He rarely travels, so after a few moments of catching up, I assisted him with the touch screen unit. He didn't have his itinerary handy and I told him to just swipe his credit card: by doing so, the system would find him and his flight. He pulled out his HBC MasterCard and to our shock, the message "Please insert a 'major' credit card" flashed across the screen. No, the machine wasn't broken. I had just used it with my "major" credit card and it worked fine.

We both learned a lesson. Not only is it essential to navigate our brave new world using credit cards (yes, we've officially been forced by the hotel, car, and airline industry to have one), but we must also make sure that the cards we do have are the "major" ones. I will explain later the differences between the various available cards.

As Canada moves forward to a cashless society (I think we're pretty much there), credit becomes a financial conduit impossible to avoid. Thus, I've started this book off with this essential subject, which is not only a taboo with friends and family but is also quite mysterious. How do you check your credit, and improve or maintain a good standing? What's on your credit report, what's not, and how do you fix something that shouldn't be there?

I fear that the outcasts and pariahs of the next decade will be those with poor credit. Those unable to secure a traditional (or major) credit card will be vulnerable to ridiculously high interest rates for the privilege of using other kinds of credit, if they can even obtain it at all. Of all the financial information I will share with you in this book, I hope you will read and absorb the information on credit. There's a stigma with credit and debt that there isn't in the rest of the financial world. We generally feel OK asking questions about investments, taxes, RRSPs, and other financial products. After all, the average person is not a financial expert and likely did not receive much if any education in high school or university about these concepts. However, as soon as we start asking our friends about credit scores and their ability to afford their debt (actually, these conversations rarely take place), the conversation shuts down. A person is unlikely to ask these questions of friends for fear of being financially "found out." And, most wouldn't dare ask their banker or creditor about credit and debt out of fear of appearing to be in financial trouble.

Even if you're financially sound, there's limited, candid information available about the nuances of the credit world: I hope to enlighten and empower you with The Money Book.

SOME DISCLOSURES

I must preface this chapter with a few things that I think are simply unfair. First, I think it's unjust that Canadians have to pay to find out our credit score. You can request a free credit report as often as you like, however, that report won't tell you your proprietary credit-worthiness score. If you're sitting with your banker for example and have authorized them to pull a credit report for a car loan, legally they aren't allowed to tell you your score. The reason? For the profit of the credit agencies, of course. Second, I don't think it is right that the two main credit reporting agencies in Canada are owned by American companies. The second largest, TransUnion, is owned by an American family. Third, the agencies and reports lack transparency and it's very difficult to get wrong information corrected in a timely fashion. And finally, many tips I'll outline to repair or maintain your credit score may seem counterintuitive. The credit agencies' proprietary methods of determining your score are not an exact science and you won't find specific strategies on their websites for increasing your score, how many points you lose or gain for certain actions (being late, closing accounts), and none of the calculations are done by a thinking, breathing human. Your credit score is determined by a computer-generated program that "assumes" many things. It's only through years of helping readers, viewers, and listeners repair their credit that I've learned the ins and outs of how to honestly and consistently keep your score positive.

I must also disclose a few of my own biases. I've known a few individuals who have purchased courses to improve their credit and absolve themselves of debt through methods that I feel are unethical. Some, but not all of these systems advocate practices such as avoiding creditors altogether, finding loopholes to not pay the creditor back, or to fight with the credit reporting agencies. If an individual signs their name to a piece of paper promising to pay back a loan, that paper should be worth something. And if they have to break that promise based on the terms of that agreement, they should do everything possible to honour it eventually. I'm not referring to debt consolidation. That's a valid practice where you get a loan, line of credit, or refinance your mortgage to then pay out all of your debts.

Credit Score Basics

So few Canadians have any idea what their credit score is or how it affects their debt. Credit is still a mystery to most and a societal taboo. But we need to start talking in order to dig our way out of this mess, especially with the current economic situation.

In early 2009, Credit Canada reported that Canadians were over $1.1 trillion in household debt. By December of 2009, the Certified General Accountants Association of Canada reported that the number swelled to $1.41 trillion and I'm sure that even as I write this sentence the number continues to rise.

You may be surprised that I didn't start The Money Book off by examining investments, the stock market, your mortgage, or some other instrument as the crux of your financial future. Think of your credit this way: It's much easier to build a brand new home than to fix a house that has a weak foundation, is full of mold, and is ready to fall apart. The same theory applies to your financial "house." It's easier to build than repair. If you have a great credit history, I want you to keep it that way. However, if your credit "house" is in need of a renovation or demolition, don't despair. With some discipline, courage, and a deep breath, your credit can be repaired.

If you have near perfect credit, then you're a part of only 5% of the Canadian population. So why would you need to care at all? First, you want to ensure that it stays strong and healthy. To do this, you must be aware of your credit rating and check it at least once a year, but I would recommend once every six months. Chances are, though, that if you are reading this, you're somewhere else in the 95 percentile.

There are three credit-reporting agencies in Canada and the two most widely used are TransUnion and Equifax. You can request a free credit report as often as you like, however, to get your FICO score (as explained shortly), you'll have to pay for that report online. With Equifax, for example, the full report with your score will cost around $24. When researching, be sure to visit the Canadian branches of the agencies, as both are also in the States. See www.transunion.ca and www.equifax.ca.

With today's prevalent internet and credit card fraud, you mustn't assume that all is well. Furthermore, most Canadians have not checked their credit report in the last year and many have never seen one at all. It is important to check that your credit hasn't been compromised; if it has, it's important to take quickly take action.

Even if you have no current need for credit, you should still pay attention to your credit score since many landlords and employers are looking for a great score. Not all employers in Canada will check your credit report, but the trend (commonplace in the US) is gaining momentum in Canada. Of course in Canada, your permission is needed for an employer to check your credit score.

INTERPRETING YOUR SCORE

Back in my old banking days, this score used to be an "R" rating. R1 was the best possible and R9 the worst. Today, the most common standard used by lenders is the FICO score. The acronym stands for Fair Isaac Corporation and it's a proprietary calculation.

Your credit score is a simply a snapshot of your current credit situation as well as your credit history over the past six years. Your credit score is an important factor in a lender's considering you "credit worthy" for future debt, consolidation, reduction of interest, etc. It's not your total picture. Your report does not factor in your employment status, cash flow, assets, net worth, or other important criteria a lender uses when deciding whether to approve or decline your request.

I'm not a lender and times have changed in Canada with borrowing becoming tighter due to the global recession. There is no magic score one should have, but the higher your credit score the better chance you have of receiving a loan. Of course, the other factors I mentioned are also important if you're seeking new credit.

The score range (with Equifax) is 300-900. Again, the higher your score the better. Only 5% of Canadians fall in the 850 or higher range. The majority of individuals (27%) fall within the 750-799 score range. Why does your score matter to a lender? It tells them, based on your past credit, repayment, late payments, etc., how likely you are to pay your future debts on time, late, file for bankruptcy, and so on. For example, history has shown that individuals with scores under 499 have a 78% chance of being delinquent in repaying their loans.

You might be asking what score you should have. Before the market meltdown in North America (in the early fall of 2008), a score of 640 was considered somewhat average, in that a lender would still consider approval if those other factors I mentioned were strong (job security, assets, net worth, etc.). However, given today's tighter lending, one should aim for a score in the 750 plus range.

If you find your score falling short of the 750 mark, you have some work to do. It takes time and regular good financial habits to increase your score, but it can be done. As you read through this chapter start to think about what your short-term and long-term goals could be. Create an action plan to improve your credit score and improve your finances. Just a little knowledge can go a long way.

WHAT'S ON YOUR CREDIT REPORT?

  • Personal details pertaining to things like your employment history and your address. Basically, information that you gave to previous lenders.
  • A detailed list of your current debts, including loans, and credit cards. This information is on your report for six years, so even if you've closed accounts, the information will still be there.
  • Each debt listed will show the maximum credit limit and the current or last reported balance (most creditors today report monthly).
  • If you've been late on your payments. Reports will show if and how many times you've been 30, 60, or 90 days late. These obviously hurt your score.
  • If you're over limit on your account, if it's in default, paid in full, etc., this will show up on your account.
  • If you've had an account go into default and it's been forwarded to a collection agency or the creditor's collections department, this will show in a section of your report.
  • Banking information may or may not be included on your report.
  • Public records and other information such as a bankruptcy or judgment against you will show up on your report.

CREDIT INQUIRIES

• An inquiry made by a creditor will automatically pull up three years of data going back from the date of the inquiry. The system will keep a minimum of five inquiries.

• These inquiries are also referred to as "hits" on your report and can bring down your score temporarily. There are "hard" and "soft" hits or inquiries on your report. For example, if you specifically apply for credit of some type, the lender will pull your report, registering a hit/inquiry on your report. If you do this with several lenders in a short period of time, your score can be pulled down since it might appear that you're "seeking" credit, which can be a red flag to lenders that you're "in need." Mark Twain once said, "A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain." A lender, of course, doesn't want the risk of lending to anyone who is desperate: They only want strong candidates. You might have innocently been shopping around for a new car or mortgage, however, those "hits" raise more questions for the last lender, such as: Why didn't you get approved the first few times? Were you declined by the first few lenders? If you can't get credit elsewhere, why should the last company you approach extend credit? It's only one factor in pulling down your score, but it does show that you should not seek credit in a short period of time with many lenders.

• If you are seeking the best rate on a loan or don't know for sure if you'd be approved with a lender, pull your report yourself and bring it to your meeting with you. (It does not affect your score if you check your own report-it shows as a soft hit.) If the lender approves you, they'll still need to pull your report and register a "hit," however, if you weren't going to stand a chance of being approved, they'll generally let you know and you'll save having another inquiry on your report that could pull down your score further.

• Soft hits or inquiries on your report will show, but do not affect your score. These are hits from things like you pulling your own report or existing creditors taking a peek at your report to see if they'd like to perhaps increase your limit. If you read the fine print when you accept a loan or credit card, you'll see that the lender asks permission to periodically check your credit (likely to see if they should increase your credit card limit later for example). These are your soft hits/inquiries.

WHAT'S NOT ON YOUR REPORT

In Canada, generally, your mortgage is not on your credit report. This is shocking to many Americans since it's on their report. Many Americans (and Canadians) wonder how we build our credit standing without our largest debt being reported. There may be instances where your mortgage could be reported, such as a second mortgage or one that's with a non-Schedule I bank (one that's not in the "Big Six") or if it's structured as a secured line of credit, but I haven't seen the latter. Check your personal report to verify whether your mortgage appears. Generally speaking, if you have a conventional mortgage, it will not show on your report. Therefore, if you've always been diligent in making your mortgage payments on time but have been a little lax with your credit card minimums and loan repayments, you might find your score less than favourable since you won't have your good mortgage payments to offset it.

Utilities, depending on the province and type (cell phone bills might show up), are not on your report. However, if you don't pay your cable bill (even if it's less than $50) for example and it goes into collections, this could show up in the collections section of your report and will dramatically pull down your score.

If you order the full enchilada as I recommended earlier from either Equifax Canada or TransUnion Canada, you'll find the reports are quite detailed, well laid out, and easy to read. Also, if there's something on your report that is wrong or shouldn't be there at all, both agencies have dispute resolution instructions on their site.

Cleaning Up Your Credit

Before reading this section, take the time to review your own credit report. Here are some tips to improve your score over time if you've found that it's less than favourable. Remember, your score is fluid. A great or poor score today can change next month and for the better or worse. You can change your score dramatically with a year's worth of positive or negative habits. Here are some guidelines to follow when trying to improve your score:

• Always make your minimum payments on time. Sounds simple and self-evident, but many individuals miss their minimum payments periodically, which can drastically pull down their score. To avoid making this mistake, enter your debt payment due dates on your calendar as a reminder. Making a payment even one day late can register a blemish on your report, which will stay there for six years. If you're over 60 or 90 days past due, this will bring down your score significantly. And if you're paying your credit card using online banking, make sure you do so at least three business days before the due date if the credit card is with a bank other than the one you deal with. If you bank with BMO for example and your credit card is with Scotiabank, make sure there's enough time for the online payment to be processed. If you bank with BMO and your credit card is also with them, you can simply transfer funds online the same day.

• Pay more than you're required. If you're maxed out on your credit cards, pay more than your minimum payment. You never want to be "over limit" on your cards, as this too will significantly pull down your score. For instance, if one of your cards has a credit limit of $3,000 and you're right at the maximum, paying the $120 minimum payment requested by your credit card company will likely not cover your interest due at the statement date (this is also the date your company will report to the credit agencies). Let's assume the interest on your card is actually $140: This would put you $20 over limit right at the time they report to the credit agencies. Furthermore, you must budget for your annual fee, insurance protection, etc. I know it may surprise you that not every credit card company will ask you to pay your minimum payment plus your over limit amount. Some will keep letting the account be over limit each month. The major credit cards (remember that when I say "major" credit card I'm talking about a VISA or MasterCard with your bank) will ask for the minimum payment plus any over limit amount or fees to bring the account back under the credit limit. However, some credit cards count on account holders being over limit each month so they can ding them with an "over limit" fee.

• Keep your balances low. Ideally, you should not have more than 75% used of your card's limit. For example, if you have a credit card with a credit limit of $10,000, keep that balance under $7,500, ideally at 50% or less. If you find yourself continuing to carry a balance, you'd be better to spread that balance over two $10,000 limit credit cards. The reporting agencies do factor in total dollars used in credit, total available credit (even if they're all zero balance), but most importantly, they view your ratio of available credit to the balance used. Obviously, the higher the percentage, the more it will lower your score, since it makes you look like you're not being responsible with their credit or that they might be in trouble.

• Don't seek new credit if you're trying to improve your score. The worst thing you can do if your score is low is to seek new credit, which is a sign of possible trouble.

• Get rid of high interest credit and department store cards. Not all debt is viewed equally. Two department store cards would be less favourably viewed than two traditional VISA or MasterCard accounts and could thus have a negative impact on your score. Because a department store card is easier to be approved for than a conventional credit card and even if there's a zero balance, the credit agency wonders why anyone would keep a card with such a high rates.

If you find that you have a number of debts with high interest rates, you may wish to speak with your banker about a consolidation loan. Consolidation loans pay off all your higher rate cards with a low rate, forcing you to pay a set amount and pay down the principal, costing much less over time. However, if your score is low, talk to your banker first about the likelihood of their approving such a loan before they pull your credit report.

If you need to rebuild trust with your banker and/or reestablish positive credit habits on your report, consider a cash-secured loan. In a cash-secured loan you'd provide, say, $1,000 and the bank would lend you $1,000. The point is to show a positive repayment history and thus build up your score or a cash-secured credit card. You may wonder why you need credit if you have cash. In this situation you don't "need" credit, however, it would be prudent to use your cash to rebuild your credit for the future.

Wrapping up this section on credit, here are a few of the most commonly asked questions I've received over the past couple of years.

Q#1: If I have a credit card with my spouse. I'm building credit, right?

A: Likely not. If your spouse has a credit card and has ordered a supplementary card on their account, you don't have to be approved as an individual. Even if you both have separate cards with unique card numbers on each, they still may be linked back to one account. You can easily find out if this is the case on the monthly credit card statement. Your spouse would be responsible for your spending and the paying back of the debt. Your purchasing would still form part of their overall account limits, credit standing, and ability to apply for loans. The basic rule is that if you didn't have to "apply" for the credit, then you're not building credit in your name. Consider if your spouse were to, God forbid, pass away or separate from you, this credit extension and card would disappear as well.

If you're the main cardholder of a credit card, you can get a supplementary card for almost anyone-your spouse, your child (maybe if they were travelling abroad), your assistant, etc.

Q#2: How do I build credit?

A: If you're seeking some type of lending with no credit history, it can be as challenging as if you were someone with poor or less than perfect credit. Using the example above, the spouse with the supplementary card (not their own card or account) could use that card to apply for, say, a department store card. I NEVER recommend this strategy generally, but sometimes it's the simplest path when building credit, if done responsibly. If you have a credit card of any type, most department stores will automatically approve you for one of their cards with a low limit-perhaps $300. Once you get this card, be diligent in purchasing small items from the store that you likely need at some point anyway and immediately pay them off, right at the store. Never carry a balance on these cards, as their rates are generally very high. Once you've done this for a few months, perhaps as long as six months if you have no balance at all, you'll find they'll generally increase your credit limit. This is a good first step. Today, many department store cards in Canada are also tied to a MasterCard. With one client of mine, after the individual followed my recommendations with his responsible use of his department store card (a limit of $300) he was offered a regular MasterCard with a limit of $3,500 in less than one year.

Remember my earlier story of the fellow trying to use the kiosk at the Toronto airport? It was a department store MasterCard that he was trying to use and it was not considered a major credit card. Having a major credit card is essential when travelling today. To build your credit, once you have a department store credit card and have had a year or two of positive credit activity, I would recommend trying to get a bank credit card. Bank credit cards are "major" credit cards and more difficult to be approved for due to tighter requirements. With a bank VISA or MasterCard, you need a higher credit score and income to qualify, as opposed to an equal limit department store card (i.e., a $2,000 limit bank credit card and a $2,000 non bank credit card such as a HBC MasterCard or Capital One Master Card). Herein lies one of the reasons why the department store card charges more interest-they're taking on riskier clients than the bank would.

Lastly, consider cash-secured loans and credit cards as mentioned earlier. The cash-secured card won't be considered a major credit card, but it can be a great tool for building a positive credit score.

Q#3: Should I get my child/adult child a credit card to help them build credit?

A: As with the first question, if you choose to give your child, spouse, or someone else a supplementary card to then assist them to apply for a department store card, please keep in mind that you are still on the hook for the supplementary card. Are they responsible enough to stick to your rules for purchases? If not, consider that you, solely, are held accountable for covering all purchases made on any card or supplementary cards on your account. If you do completely trust your child, you may wish to have your bank or credit card company give you a low limit (say $500) credit card and get the supplementary card on that account. That way, if you were wrong about your child's spending habits, the most you'd be out is $500, as opposed to more from some of the much higher limit products available.

With this strategy, remember, they're still not building credit with the supplementary card. You're simply getting them one so they can then get a card of their own (as mentioned in the previous question) and then you could cancel their supplementary card on your account.

The last time I spoke with VISA and MasterCard, they told me there is no age requirement for a parent wanting to get a supplementary card for their child. While I'm not a proponent of getting your child a credit card, it might make sense to give your child a supplemental card if they are travelling overseas on a trip or leaving to school for an extended period. Instead of possibly having to wire money to your child, you could get them a supplementary card as an emergency option.

Q#4: If I get all those credit card offers in the mail telling me I'm pre-approved for $10,000, $50,000 or more, I must have good credit, right?

A: No, not necessarily. Credit card companies, unless you already have an account with them, cannot access your credit report. That would be an invasion of your privacy if you have not authorized them to do so. These card companies are assuming you have good credit based on your postal code or some other list. Or, perhaps it's simply a numbers game for them: mail out enough of these offers and someone will actually apply. Always, always read the fine print. There you'll usually see a magic annual income needed for that approval along with a long list of other disclaimers and approval requirements.

Q#5: Suze Orman says to pay yourself before you pay your credit card payment-is this a wise thing to do? I heard Suze Orman (American Financial Guru) say on her show that viewers in financial trouble should pay themselves first (save what they would pay on their credit card) before they even pay their credit card payments, even if it means their score will dramatically decline. Is this a wise thing to do? (This question came in late 2008 when the financial crisis was talked about on all the airwaves in the US and Canada.)

A: First, Suze is an American Financial Guru. One must realize that the Canadian and American banking and financial systems are almost like night and day in most respects. The banking system has been hit much harder in the US. Since they have very little regulation down south, many financial institutions operated like the Wild West-it was shocking to read the media reports of how little regulation the American banking and financial system had in place before the recent crisis.

According to a statistic I heard on CNBC's On The Money, as of late 2008, over 62% of American credit card holders had their credit card limits reduced (forced upon them) or closed entirely by the issuer (during the crisis), so I can see why Suze would make such a recommendation. Technically, because a credit card is revolving and a "demand" loan by the lender, a credit card company is well within their right (even though it's not common practice in Canada) to close a person's account at any time. If someone were facing financial difficulties and paid their credit card diligently but had no savings for themselves, and then the issuer, out of the blue, cancelled their credit card (demanding full payment), it might be prudent to have some emergency cash savings. After all, survival at that point would be more important than worrying about a credit score that could later be fixed.

However, in Canada, we're not facing the same dilemma as our neighbours to the south. Sure, credit's a bit tighter here, but we're on solid footing. Actually, the IMF (International Monetary Fund) has ranked Canada as the strongest banking system in the world. I've also spoken to the Canadian Bankers Association, the banks, and credit card companies and they tell me it's business as usual. They haven't suspended or closed credit card accounts due to the recession.

A point of interest to be aware of is that even if the credit card companies in Canada are not following what their US counterparts are doing and closing out credit card accounts, legally they are allowed to do so. A credit card works like a demand loan-the operative word being "demand." According to the fine print when you signed up for your card, the company can technically demand payment in full at any time.

So having a solid slush fund of three to six months' savings (equivalent to your income) is always prudent, however, in our country, I would not recommend missing any credit card payments in order to boost a savings account; our system is pretty stable. Furthermore, one missed credit card payment can haunt your credit report for years and pull your score down dramatically. Plus, if you were paying double-digit interest rates on your card, it wouldn't make sense to throw your money into a savings account paying a dismal rate of return.

(Even though I answered this question in January of 2009, much of what was happening in the US is still plaguing the population. Experts aren't unanimous on whether the crisis is over or when it will start to ease, let alone recover. Be cautious when listening to media reports about the economy, banking, and finance, as the US system is dramatically different from ours.)

Q#6: If I exercise the "skip a mortgage" payment option, will this affect my credit score?

A: No. This is an option that many Schedule I banks offer (i.e., the big banks such as TD, RBC, Scotia). Today, if you bank online, you can even apply to exercise the option immediately. However, it's still at the discretion of your lender. You can only skip a payment once a year and remember you're now paying compound interest over the term of your mortgage by refinancing that skipped payment. Be cautious about skipping a payment and do so only when you really need to.

But as long as you haven't "missed" a payment, are on time with your payments, and don't have any amounts in arrears, this would not affect your credit rating.

Tip Stop

Remember, most Canadians don't realize that their mortgage payments are not included on their credit report, so ensure that your loan and credit card payments are always on time and in good order. Your diligence in paying your mortgage is great, but won't help bring up your credit score.

Q#7: I called my credit card company and asked them to reduce my interest rate. Will this affect my score? I was surprised that they were willing to negotiate and did in fact drop my rate as asked. After I hung up, I wondered if they'd see this as a sign of financial weakness? I can pay my bills and am not having troubles with debt-I simply wanted a better rate. But will this affect my credit score?

A: No, it won't affect your credit score. For it to do that, you'd need to be late with a payment, over limit on your account, or in default or nonpayment.

You really did do the right thing and most people are surprised that they can negotiate with their bank or credit card company. More often than not, when asked to lower an interest rate, a bank or credit card company will agree.

Give it a try and start negotiating yourself. Ask for the annual fee to be waived, a reduction in your credit card rate, mortgage/loan rate, and more. A simple question could save you hundreds or even thousands of dollars!

Q#8: Why did my score drop when I closed out two accounts? I had an excellent credit score of over 800 and have always paid my bills on time. I closed out two credit card accounts, as I didn't need them anymore and hadn't used them in some time. Then, to my shock, I found out that my credit score dropped down to about 740. Why did this happen?

A: The credit reporting agencies are vague with answers to questions like this. There are no specific criteria (that I know of, anyway) that tell how much your score will go up or down based on closing accounts, opening accounts, etc.

However, yes, unfortunately, one's score will temporarily drop when closing an account. Why? I don't have the answer. This is the craziness of the credit reporting agencies and the credit card companies. The man who asked the question above found out from the credit card company that his score would indeed drop by closing the account. His question was, "Why didn't they tell me this before I closed the account?"

When your score is being determined, all of your accounts are factored in. Having two credit card accounts with a zero balance is actually a good thing. Do not close these accounts. If you find that you're not using them, put the credit card in a safety deposit box, use it once a quarter and pay off the entire balance immediately, just to keep it in good standing and to continue to have positive reporting on your account. Check if the card has an annual fee. If you're not using the account regularly and do have a high annual fee (such as a points/reward card), switch it to a no fee or low fee option.

My suggestion if your accounts have been closed anyway and your score has dropped is to consider taking out a new credit card. Initially, your score will likely drop slightly by doing this, but within a few months of keeping a zero balance (but using it regularly and paying it off) it will bounce back.

I don't make the rules and I do take issue with them when it comes to the credit reporting agencies and financial practices of the credit card companies. Mostly, I don't like the limited amount of information and education on their practices that is available to the general public.

Q#9: How do I dispute something on my report?

A: You can dispute or make a comment on your credit report directly with Equifax or TransUnion. See their website for instructions. If something has been wrongly reported, you may wish to contact the company that incorrectly reported to the bureaus and ask them for a letter stating the reported information was incorrect. If you're applying for credit while this process is in place (it can take up to six months to have something corrected on your file), obtaining a letter directly from the company that reported the incorrect information will generally suffice for most lenders.

Q#10: How many credit cards should you have?

A: As discussed previously, don't accept credit card offers in the mail, over the phone, at the airport, or in a department store. Limit the number of cards you have and ensure you carefully read the annual costs and other hidden fees for the cards you do have. I suggest you have at least two credit cards, preferably one major VISA and one major MasterCard. Plus, ensure you always have one card with a zero balance (if possible) for emergencies.

Q#11: OK, I'm in trouble. What should I do? Is there hope for me or do I have to seek bankruptcy?

Bankruptcy is a legal process by which individuals or businesses seeking government protection from creditors when the borrower is unable to repay the debt owed. Although bankruptcy may sound like a good option, it is a serious process that one should not enter into lightly. The trust of a lender or service provider is broken when all payments cease. To be absolved of this responsibility can potentially have damaging consequences for one's self-esteem. In the past, I had counselled a number of clients who had no option but to file for bankruptcy. The blows to their self-esteem were long sustained, not to mention the negative impact bankruptcy had on their ability to borrow in the future. What I was surprised to learn was that the clients who were least emotionally bruised were the ones who were slowly paying back their creditors, even though they didn't need to and weren't required to do so in their bankruptcy agreement. Honouring their commitments was important to them. Although their insolvency afforded them a second chance, they took responsibility for keeping their promises.

I neither support the process of bankruptcy nor condemn those who fall prey to overeager credit providers or unfortunate life circumstances. What I am saying is that bankruptcy should be considered a LAST RESORT. If this path seems like your only option, consider the impact that bankruptcy can have on your emotions and credit before you initiate the process. Furthermore, many bankruptcy trustees fail to mention that once you file, a number of careers are automatically closed to you, including those in the financial industry.

It is important to note that not all debt would be discharged. For example, you cannot be absolved of your student loans and child support payments.

Before declaring bankruptcy, first figure out where you are. You might not be in as much trouble as you think. So many individuals file bankruptcy for small amounts of debt.

Second, what assets do you have? Are you able to consolidate your debts with your bank thereby reducing your interest costs and monthly payments? Depending on your situation, you could cut your costs in as much as half by fixing your high interest rate credit card debt to a mortgage (assuming you have equity in your home). Consult your banker, financial planner, or the credit counselling agencies in your specific province (head to www.kelleykeehn. com/themoneybook.html for a list of resources) before visiting a bankruptcy trustee.

You may wish to go directly to your creditors for help. Most do not want you to default on your agreements and will usually work with you, especially if your cash flow situation is temporary. If you have a gold credit card and your balance never seems to be paid off, your bank might have a lower rate credit card that you can switch to or a loan with a much lower rate and forced principal repayment options.

There are costs associated with bankruptcy that depend on your income, assets, and other factors. Bankruptcy is not simply walking away debt free (unless you have a very low income and no assets), there are trustee fees that vary from province to province, and each province has a fee for filing bankruptcy which needs to be paid by the individual filing for bankruptcy or by liquidating their assets.

Lastly, although there are many ethical bankruptcy trustees out there, their bias is generally towards that end. A good friend of mine was in very serious financial trouble about fifteen year ago. He was encouraged not only by trustees to file for bankruptcy, but also by his friends and family. Everyone told him that his credit and situation was so severe that bankruptcy would absolve him of his debt repayment requirements and his score would improve quicker than trying to repair it himself. But for him, it was a matter of pride and honour and he vowed he wouldn't break his promises to those he owed money.

At times, his situation was so bad that his car and his wife's minivan (that they needed to drive their kids to school with) were repossessed. His business phones were disconnected due to lack of payment and he owed the government gobs of money. Almost every dollar he brought in was garnished for the taxes he owed. His wife later confided that there were times that she'd only have $2 to put in their car for gas and prayed that the car wouldn't stall getting the kids to school.

I watched my friend struggle for over a decade (he had struggled for many years before we met). He'd get ahead slightly and then some major financial catastrophe (some very much his fault and some not) would blindside him. But he was never derailed from his determination to clean up his credit and become debt free.

Today, nearly three decades later, he appears to many to be an overnight success. He has two multimillion-dollar companies and is personally debt free. The very companies that were cutting him off financially now beg for his business.

Would my friend have been better to simply file for bankruptcy and have a fresh start decades sooner? The simple answer is yes. But would he really have been better off? Many trustees and counsellors I have chatted with share the sad statistic that many they counsel never got the second chance message and in fact were on their second, third, and even fourth bankruptcy.

When choosing someone to talk to about potential bankruptcy it is a good idea to first go to www.creditcounsellingcanada.ca and find a list of credit counsellors in your area. Once you have some choices, contact the Better Business Bureau to ensure they are a reputable counsellor and ask if they are for profit or not-for-profit.

Check out my website for some fantastic budgeting worksheets at www.kelleykeehn.com/themoneybook.html

Q#12: I've had something recently go to collections. Will that show up on my credit report?

It may or may not. If you have a collection agency contacting you, it's in your best interest to clear this up as quickly as possible. Simply ask the agency if they've already reported the occurrence on your credit report. Many won't if you act swiftly. And ensure that you keep excellent records of your payments. Some companies have been known to try to re-collect years later, leaving you to prove that you've paid the outstanding amount. Even if you're in the right, it may take you some time to remover such an error from your credit report.

Q#13: How long does something stay on my report?

Six years in most provinces.

Q#14: Are there times when I should establish credit even if I don't need it?

Remember the Mark Twain quotation? It's paramount that you apply and secure sufficient credit while your financial situation is solid (if possible). Although I cautioned earlier about taking on too many credit card accounts, there is a delicate balance between too many and not enough.

Here's an example. You've been employed by your current company for some years. Your general financial picture is solid. You decide to leave your company and open your own business (or perhaps leave to have more children). Six months into your business, after not receiving a salary, you realize that you really could use an operating line of credit to get you through that tough first year in business. Now when you apply for credit, the lender will look at your current income (which is none in this example), see that you're on a new, perhaps risky venture and your employment history will not be fully considered. Many in this instance would not be approved without collateral or some other strength.

Ideally, in the above example, if you knew you were leaving your stable career as an employee, you would apply for a line of credit before you left that position. However, should you need it later, when your financial situation is less stable, it will be there for you without the need to apply for it.

Case Study - Ethan

WHERE ONE PERSON WAS AND WHERE HE QUICKLY WENT.

The following is a credit case study on an individual I'll refer to as Ethan, which of course is not his real name. Ethan came to me for help in 2004 and has agreed for me to use his information and situation as a case study (provided his name was changed and his situation described generically).

Ethan was in severe need of credit counselling and was one small step away from bankruptcy, but within a relatively short period of time he turned his financial future around.

When Ethan first came to see me, the business he had recently opened was struggling relentlessly. He jokingly commented on several occasions that his receptionist worked one third of the hours he did and was taking home twice the pay. Each month, his financial situation worsened. He used one credit card to pay the minimum payment on another, was behind 30-90 days on every one of his loans and most days, didn't have the courage to even check his bank accounts and how many NSF (non-sufficient fee) charges were going through. He didn't know if there would ever be a way out.

The following is a chronological look at how Ethan rebuilt his credit, life, and financial self-esteem, step by step.

FEBRUARY 1, 2004

Ethan knew he was in trouble. He just didn't know how bad it was. He also knew he should pull a credit report, but didn't have the courage on his own. With a little figurative hand holding and a deep breath, we ordered an online report. The news wasn't great. To give you an idea of how brutal his situation was, it was only when Ethan filed his 2004 taxes that he realized that he had incurred over $1,700 in NSF charges for the year.

Score on February 1, 2004: 530

It could have been worse, but at 530, things were bad. According to Equifax Canada, only 4% of the population has a score as low as this. At that score, 60% will default on a loan, file for bankruptcy, or fall 90 days past due. The only group score worse than Ethan's is that of 490 or less: that group constitutes 78% of all delinquencies. Ethan was certainly, not the ideal candidate for a consolidation loan with a major bank. Ethan had even applied for the highest rate credit card offered to him weeks before coming to see me, hoping to use it to pay current monthly bills, but his application was declined. His sheer willpower and vow to never declare bankruptcy kept him focused on the financial repairs he needed to make.

HIS SITUATION IN 2004

Ethan wasn't quite ready to pack up his business and throw in the towel. He had sunk every dollar he had into his company, spent 70-80 hours a week for the past two years trying to make a go of it, and desperately hoped things would turn around.

He had three credit cards with maxed out balances of $7,900, $2,900 and $650. The startling issue with the last card was that his limit was $250 but the total balance owing was $650. How is this possible? Some cards, and usually non-traditional bank credit cards, have many hidden fees. Since Ethan was continually late with his payments and the monthly interest and penalty fees kept adding up, the card with the $250 limit's balance nearly tripled.

One of his bank-issued cards had some surprising fine print as well. Ethan's annual interest rate was 18%. However, as we were carefully reading his most recent statement, there was a small paragraph that stated that since he had a history of not making his minimum payments on time, his current annual interest rate had increased to 24%. Until he made his minimum payment on time for at least six months, his annual rate wouldn't drop back down to 18% again.

Ethan's other personal debts included:

  • A car leased at $480 per month
  • Two loans with a small lender at 28% interest with monthly payments of $800
  • A first mortgage with a Schedule I bank
  • A second mortgage with a private lender with payments of $250 per month
  • No department store credit cards, collection on his credit report, bankruptcy or other major blemishes
  • Other factors affecting his score:
  • Credit card one: two payments more than 30 days late
  • Credit card two: no late payments, but over limit
  • Credit card three: late payments, which have pushed the card over limit
  • Loan one: four 30-day-late payments and one 60-day-late payment
  • Various past credit (loans and credit cards) paid off, up to date, and no further reported late payments.

A macro recap of Ethan's situation and credit score are thus: The number of current late payments, over limit situations on his credit cards, and the number of current debts have all brought Ethan's score near to the worst possible.

At this point, he was seeking help, but really needed to know where and how severe the situation was. He was barely keeping his business afloat and had no idea how he was going to pull himself out of his situation. His company was not making enough for him to cover his personal monthly obligations, let alone that of his business.

Despite my advice, Ethan decided not to do anything at that moment. He had a number of emotional issues that meant he couldn't act.

NOVEMBER 2005

Ethan came back to see me with his updated credit score. He hadn't done much financially since the last time I'd seen him. His company was still struggling, as was he personally. However, he was much more aware of his situation, and trying to pay his debts on time, but with a cash flow that was sketchy at best, he was still juggling which bills would be paid and which ones not each month.

What was different for Ethan this time was that he had opened a second business that was starting to produce a profit. He was very committed to turning his life and financial future around and seriously wants to do whatever it took to improve his score and fate.

Ethan had a home with considerable equity in it, but since his score has been undesirable to lenders and his income over the past year was near nil, no Schedule I bank wanted to consider lending to him based on that equity. Since he couldn't magically change the fact that his income was near nothing, the only thing he could do was improve his score. His goal was to obtain a new mortgage in the spring of 2006 and consolidate all of his debts, if possible.

Score in November 2005: 653

At this point, his score had improved slightly from his situation in 2004. He still had a number of current late payments and two of his credit cards were still over limit, but he hadn't been seeking credit, which is good, and his hard hits were all fairly old.

At a score of 653, Ethan was in the 11% FICO score range. The delinquency rate for the group range 650-699 was still 23%, therefore a conventional lender would still likely consider him a high risk and limit his options for new credit or a consolidation loan, which he was so desperately seeking at this point.

JANUARY 2006

Score in January 2006: 658

Ethan was really trying at this point. His score hadn't moved up much at all since November. He wanted his next batch of scores to be over 699. He worked hard to keep his balances under the maximum and had even gone as far as to swallow his pride and borrow a few hundred dollars from family members to ensure he paid his minimum payments on time.

FEBRUARY 2006

Ethan finally made contact with a lender at a Schedule I bank. The lender wasn't thrilled with Ethan's lack of reported income over the previous three years or the number of late payments on his credit history. However, with the amount of equity in his home and the recent climb in his credit rating, his lender was willing to try.

Ethan had hoped to obtain a mortgage for approximately 75% of the value of his home, which was still a conventional mortgage not requiring him to obtain CMHC insurance. (Today, you need only 20% as a down payment to avoid paying CMHC fees. We'll examine that in depth in the debt chapter.) His goal was to acquire enough financing that he could pay off all of his debts and perhaps receive a little more to renovate his home or invest in the stock market.

For Ethan to fully pay off all of his high interest rate debt, he would need a mortgage of about 60% of the value of his home. At the time of his application with the bank, they were only willing to lend him up to 50% of the appraised value. Although somewhat disappointed that he wasn't able to pay off all of his debts, Ethan was thrilled that he would be able to pay off his extremely high interest debts. The mortgage counsellor also informed him that if he took care of his credit over the next six months and improved his score, he could likely come back and obtain a line of credit. As far as I know, Ethan did just that.

MARCH 2006-MY LAST VISIT WITH ETHAN

Score in March 2006: 723

As you can imagine, Ethan was simply thrilled with his new score. In just over a year, and with a reasonable amount of effort and minimal pain, he was able to take his score from one considered unsavoury by the lending industry to one that made him a viable candidate for a loan. By paying down and eliminating many of his loans, credit cards, and the second mortgage, his score jumped considerably in just one month. At this score, Ethan shares his spot with 32% of the population. His score is still below average, however, many lenders would consider this satisfactory. The delinquency rate for those residing in this score range (700-749) is only 5%.

Ethan vowed to never again purchase more than he can afford, fail to meet his minimum monthly obligations, or allow his business to push him further into debt.

Ethan's story was originally featured in my book, She Inc. I was curious to see if Ethan had kept up his vow for financial freedom or had he fallen back to his old ways? I spoke with Ethan in January of 2011 and he's still slowly working to pay off his debt, but is thrilled to report that his outlook on money and spending has changed dramatically. He told me that he spent a great deal of time examining his old ways of spending on credit and making impulse buys. Today he still feels the occasional need for "stuff" that he can't afford, but he's made a promise to himself since we last spoke that he'd wait 24 hours before making any impulse buy (which he says he does and has saved himself considerable dollars by practicing this). He's bringing in extra income renting out his basement and regularly tweaks his budget by taking an in depth look at his spending twice a year.

Mistakes to Avoid

MADISON: READ THE FINE PRINT

Madison is a very bright young woman finishing her Ph.D. Like many of us, she's overtaxed from working while finishing her doctoral studies and is guilty of not always reading the fine print. Madison was moving from B.C. where her family lives to attend school in Ontario. Before she left home, she needed a laptop for school, but, of course, didn't have the money to pay for it. She was shopping at a local office supply store and the sales attendant informed her of their store credit card offer. The sales person told her that she could get a laptop that day with no interest and no payments for six months as long as she paid with their credit card. Delighted, Madison left with her new computer.

A few weeks later, Madison headed to school in Ontario. Shortly after, Madison's dad called to let her know that the first letter for her laptop purchase had come in from the office supply store. She told him not to worry about it (and not to open it-she didn't want him to see how much she spent on the laptop) and that she had a no interest, no payment deal for six months. Each month though, her worried dad would give her a ring when this envelope came in the mail and with each call, she reassured him.

Several months later, Madison wanted to change cell phone providers. She filled out the application and to her shock she was declined. She was completely baffled about how it was possible since her credit card and student loan payments were on time every month. When she went home to check her credit score, she found out that it was a frighteningly low score under 500 and the account on her laptop was sitting in collections.

After a few phone calls she found out a critical piece of information that the sales person had neglected to tell her. The store credit card actually offered six months interest free, not payment free. The mistake ruined Madison's credit, and she'll be repairing it for the next six years, simply because she didn't read the fine print. Lesson to learn: never trust what anyone says a document states without actually reading every word of it yourself. If you don't fully understand or agree with any clause, don't sign it!

LIAM: BEING JUST A LITTLE LATE CAN COST BIG BUCKS

Liam always pays his credit card's minimum payment each month, but somehow, he's always just a few days late. He always finds a reason for not getting to the bank in time to make his minimum credit card payment each month or forgets when he pays it online to factor in the three business days required for the payment to make it to the credit card company on time. One day, he brought all of his financial statements to me and asked if he could be doing something better with his situation.

While sifting through his papers, and specifically his credit card statement, there was a small sentence at the bottom of his credit card statement's front page that read: "Until you make six months of consecutive minimum payments on your account, you will be charged 29% interest." Because Liam was chronically late making his payments over the past year, he had been paying an interest rate of 29%, not the 18.5% (which is high enough) that he thought he was paying. Because he was late and failed to read his credit card statement each month, he missed a huge red flag and money was wasted over the years.

Let's crunch the numbers: Assuming Liam actually paid his credit card on time, but only paid the minimum payment:

Balance: $9,200.00

Original interest rate: 18.5%

Minimum payment: $276 monthly (3% of the outstanding balance)

Assuming he locked his credit card in the freezer in ice and doesn't make any new purchases until it's paid off, it would take Liam (ready for this?), 18 years and 4 months to pay off his credit card and he would pay an additional $8,736.83 in interest.

If Liam committed to paying his monthly minimum payment each and every month plus an extra $44 a month (so, his payment would now be $320 instead of the required $276), he would pay his credit card off in just three years and two months and only pay $2,799.00 in interest-a savings of just about $6,000 and it would take him 15 fewer years to pay it. Just by paying on time and upping his payment a measly $44 a month (just over a $1 a day)!

The real scenario:

If Liam had never come to me and kept paying his minimum payment late each month, he would have continued being subject to a 29% annual interest rate. Look at how the numbers change if he had only made the minimum payments at this rate:

It would have taken him 38 years and 8 months to pay off the card, plus he'd have paid an additional $31,127.80 in interest. Even if Liam didn't make any extra payments over the minimum, his not paying attention to the increased interest rate being charged could have cost him an additional $22,000 and added an extra 20 years of making payments.

DANTE: FIGHT, BUT STILL MAKE PAYMENTS

Dante returned his luxury car, which he leased, when the contract still had six months to go. When he returned it, the dealer determined that the car hadn't been properly serviced over the years, there was a little more wear and tear than his contract allowed, and that he was over on the allowable kilometres, and therefore the car's residual value was less than was estimated in the original lease agreement. Dante was furious and when the dealer wouldn't budge, he stormed out of the dealership. But why should he care? He returned the car; it was their problem now.

He called the carmaker's head office and the client care representative said that they would work with him to resolve the issue. Phone calls went back and forth with the dealer and head office. Months passed and the issue still had not been settled. Dante thought nothing of it; he was on top of the situation, as far as he knew.

Three months passed and it was time for Dante to renew his mortgage. He has a great relationship with his bank and earns a pretty decent income, but because he's self-employed, he finds it is still a challenge to get approved for financing. But, when he met with his banker, Dante was told that his application was declined. Dante had been diligent in paying all his debts on time. When he was told about his low credit score, he didn't believe it.

What happened? Well, the dealership put the amount owing on Dante's lease into collections and since Dante was still on the hook for the last six months' payments, his credit report showed him four months in arrears (this is a huge blow to a credit score). The fact that it was in collections also greatly brought down his score. If Dante had come to an agreement and settlement when he brought his leased car back to the dealership, he would have been done with his agreement. Although Dante (and everyone for that matter) had the right to fight a contract or debt obligation he felt was unfair, he still should have made his minimum payments each month. Fair or not, the credit bureau doesn't know about the dispute you're having. Dante would have been better to keep making the minimum payment and try to recoup that money later on from the dealer, rather than ruin his score and try to get that off his credit report later on. Dante will eventually be able to get the car payments out of collections, but the hit to his score for not paying for four months will be detrimental and will show on his report for the next six years.

ZAIRA: DOING EVERYTHING RIGHT, BUT…

Zaira is the perfect example of handling credit responsibly. Not only does she pay her credit card on time every month, but she pays the full balance each month too. It irks her to pay one cent in interest. When Zaira finally got around to checking her credit report for the first time, however, she discovered that she had a very mediocre score. How could this be when she not only pays her card each month, but pays it in full? She also has two loans-a car and student loan-both of which are up to date and paid each month on time.

It's possible that Zaira is carrying too much debt on the loans or that when the bureau adds up her available credit, it still calculates her as having too much "credit." (Keep in mind that if she has, say, $20,000 limits on her credit cards, even though she keeps a zero balance on them, the "non-thinking credit bureau" factors in that she could max them out at any time.)

A second and very important possibility is that she's not aware that the credit card companies report your balance at the "statement date," not the due date. I personally have three credit cards-one has the same due and statement date-the other two do not. It is generally the norm, not the exception, that a credit card will have a different statement and due date.

Let's use Zaira's situation to illustrate:

• November 15, 2010-The date that Zaira's credit card statement for the month of November is issued. (Look at the top left or right on most statements to find the date.) This statement tells her the minimum payment due (even though she pays everything off each month) and the due date of December 8, 2010.

• December 16, 2010-Zaira's billing date for her December statement stating that her new minimum payment is due by

January 8, 2011 and so on.

Here's what happened in December.

• December 6, Zaira goes to her bank and pays her credit card off in full.

• That's perfect-a zero balance with days to spare before it's due, therefore, Zaira pays no interest.

• On December 14, the installers of her hardwood floor arrive and she decides to pay them with her credit card for the points. Her available credit on her one card is $10,000 and the hardwood bill is $9,200-perfect!

• Zaira goes about her life not thinking about her credit card balance because she knows she has until early January to pay it off in full before she's subject to interest costs.

The Problem: December 16 is the date that her credit card company reports to the credit reporting agencies. So, if Zaira makes a major or even significant purchase each month before the statement date, it will bring her score down even though she has until early January to pay it off. Most consumers are shaken when they find out this information about the actual date balances are reported.

So what is the lesson? Make note of two dates in your calendar for each credit card. One: the due date for you to pay off the entire balance to avoid interest costs or at least to make your minimum payment on time. And second, the statement date (if different) and ensure the balance on this date is as low as possible. Don't make major purchases before the statement date. If you're close to being maxed out, remember, the statement date is also when the interest is applied to your account. If you're carrying a balance, this could tip you over limit. You don't have to keep track of the statement date if you're not concerned about your score or if you never make a large purchase (or rarely do) each month and pay your balance off. But, if you do carry a balance and are trying to repair your credit, it would serve you to keep careful track of both.

A question I received from a participant at a recent workshop was, "Wouldn't the credit bureau know that you were paying your balance off every month even if you happened to run it up at statement date?" The answer is no. If your credit card company just reports your balance once a month and that happens to be on the statement date (and perhaps, when you have a high balance), then no, paying off your credit card in full each month will not be captured for the sake of your credit score.

BROCK: THE MINIMUM ISN'T ENOUGH WHEN YOU'RE AT MAXIMUM

Brock is maxed out on his one department store credit card. He's making the monthly minimum payment requested and on time, but the problem is, he's maxed out and paying dearly for it.

Credit limit: $3,500.00

Interest rate: 29.9%

Statement date: October 23, 2010

Minimum monthly payment: $126.00 due on November 18, 2010

Here's the problem. Brock pays the minimum of $126, but he also has his monthly gym membership coming through on this credit card. On his last statement date in October, the finance charge (the interest due) on this account was $91.92. Basically, since Brock is always maxed, he can estimate what the interest will be and adjust what his credit card company is asking him to pay and pay more. His gym membership is for $48.28 each month. Add that charge to his finance charge and Brock has $140.20 worth of additional charges on his card this month. If he pays the requested

minimum payment of $126 he's short only $15.80, but his credit card company allows his membership fee to go through, instead of declining him. For that convenience he's paying an extra $29 each and every month he's over limit (called an over-limit fee). Because Brock has been doing this for close to eight months without paying attention (and his credit card company still asks for the same minimum amount allowing him to go over limit each and every month), his current balance is actually sitting at $3,759.81. That's right; he's racked up $259.81 in over limit fees alone. Not only is this crazy (had he not gone $15.80 over limit each month, he'd have the $260 in his pocket), but it's also hurting his credit score every month.

For Brock to avoid being over limit, his next payment should be:

The minimum of $126.00 + the $259.81 he's currently over limit + his gym membership fee + a cushion (ideally of a few hundred dollars-keeping in mind the annual fee that will eventually be due as well).

Because the credit card company only asked for a certain amount to be paid, Brock is paying heavily. Lessons learned: read your statements carefully, do the math, and even if you can't get out of a jam in one month, a few extra dollars here and there allocated to your credit card balance will eventually get you on the right track. Plus, in Brock's case, he should examine how much that gym membership is actually costing in interest and fees and consider cancelling it and opting for some no cost running and a few weights around the house!

Tip Stop

If you find yourself in a situation like Brock's where your card is at the max each month, call your credit card company and tell them that you never want them to allow a purchase to go through which puts you over limit. (Allowing you to go over is a practice usually done by department store credit cards and non-bank VISA and MasterCards-bank obtained credit cards usually won't let you go over limit as easily as the others, but they still do.) The credit card companies will try to sell you on the notion that they're doing you a favour by allowing you to go over limit, but they're not. Not only do they charge exorbitant interest rates, but the over limit fee is usually much higher than the amount they'll let go through.

Recap

• Credit has become necessary to function, travel, and exist for most of us in today's environment.

• Be selective when choosing credit cards, loans, and other sources of credit-read the fine print!

• Limit the number of credit cards you have, but ensure you carry more than one.

• Delinquencies can stay on your credit report for six years.

• Become familiar with your credit report and check it at least once a year.

• If you find yourself in trouble with debt and are unable to make ends meet, seek help from a reputable credit agency.

See my website for a list of budgeting resources, credit counselling agencies in Canada, and more.

Excerpted from The Money Book for Everyone Else. Copyright (c) 2011 by Kelley Keehn. All rights reserved. Excerpted with permission of the publisher Insomniac Press.

 

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