DO borrow only when you need to
Lots of places will lend you money. But there’s always a cost: the interest you pay. If you pay cash, you can always get the same item for less – sometimes a lot less. So the first rule is to make sure you only borrow when you have to – and for things that have lasting value.
Avoid using credit simply to get something you want. Make sure it’s something you truly need. Not sure how to tell the difference? Learn more
Sometimes you have to borrow money today to have a better future, like when you borrow for education or to start a business. Or, you may borrow to buy very expensive items, like a house or car. In cases like these, borrowing can make sense.
DO shop around for the lowest interest rate
Whatever you’re buying on credit, the second rule is simple: shop around for the lowest interest rate. Credit cards are often the most expensive way to borrow. So always find out if you have other options. For example:
- Buying a house This is a large purchase, so most people have to borrow to pay for it. Most often, they get a mortgage. You can get mortgages from banks, credit unions and other financial institutions like trust companies.
- Buying a car, appliance or electronics Companies (like car dealerships or furniture retailers) want you to buy their products and will often finance your purchase. Credit cards and lines of credit can also make shopping a lot easier. Lines of credit are available through financial institutions, and you can get credit cards from banks and many major retailers.
- Paying for school If you’re a student, the government may lend you money to help you pay for education after high school. These loans often offer very favourable terms.
- Investing Brokerage firms may lend you money, either to short sell stocks, or to buy on margin. Read: How does short selling work? and How does buying on margin work?
If you’re making a major purchase like a house, a fraction of a percent can save you thousands of dollars. Make sure you know the right questions to ask before you borrow money.
DO pay attention – not interest
If you plan to borrow for a longer period of time, there are ways to minimize the amount of interest you pay:
- Plan ahead. If you know you’re going to buy a house, for example, get a pre-approved mortgage; set up a line of credit when times are good. It’s easier to negotiate a good rate when you have time on your side. It’s also easier to get approved for a line of credit before you may really need it. Don’t wait until you fall behind on your rent or mortgage to apply.
- Pay your bills in full and on time. If you miss a payment, your interest rate may go up, and you will lose your grace period. Make sure you make the minimum payment every month. (Read: Related contentWhat does it really cost to borrow? )
- Pay down your debt quickly. The faster you pay off the principal, the less interest you will pay. Even paying your mortgage off biweekly rather than monthly can save you a huge amount of interest.
DON’T get more credit than you need.
Using credit wisely is good, but overusing it is not. So, how much credit is too much? Some rules of thumb:
- Only carry from two to six credit cards Include a Visa or MasterCard, as they are accepted at most merchants.
- Keep your debt ratio under 30% to 50% If your credit card has a $5,000 limit, don't carry a balance of more than $2,500. If you max out your cards, creditors may think you’re a risk.
- Know the score. Get a copy of your credit report once a year – it’s free.
Did you know? The average person carries 11 "credit vehicles." In most cases, seven are different types of cards and four are instalment loans for cars, furniture, student loans or mortgages.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.