As with smoking and binge drinking, addiction to credit can be a crippling vice and one that's just as hard to quit. Over the last few years, near-zero interest rates have lured many Canadians into taking on record levels of household debt. A recent report by bond rating agency DBRS showed that total Canadian household liabilities were at an all-time-high of 146.2 per cent of disposable income at the end of 2009. But Wednesday's benchmark rate hike by the Bank of Canada, the third in a row, should give pause to anyone thinking about shouldering more consumer debt. It's time for many of us to kick the credit habit.
"We as Canadians are way luckier than in the U.S. because we've had warnings for the last year and a half that rates are going to rise," says Jeffrey Schwartz, executive director of the non-profit Consolidated Credit Counseling Services of Canada. Although the rate increases have not yet had a significant impact on consumers, Mr. Schwartz believes we should "take the opportunity to get our house in order."
Like any bad habit, a reliance on easily available credit can only be curbed through a change in attitude and daily behaviours. Here are some of Mr. Schwartz's tips for credit addicts.
Create a budget.
The first step in the process is putting together a budget that will allow you to see exactly where your money goes each month. "It's not about cutting back necessarily," Mr. Schwartz says, but about finding alternatives to the items you're spending on so that you can create a surplus in your budget each month.
Identify needs versus wants.
Many of us often fall into the credit trap because we mistake our "wants" for "needs". Much of what we see as necessities are simply items we have become accustomed to having. For example, Mr. Schwartz points to cellphones as a growing expense in many families' budgets, yet we all got along fine before they became ubiquitous. Any savings to be found in your household budget will come from these kinds of discretionary items.
Stick to cash or debit.
It's all too easy to reach for the credit card for discretionary purchases and put the thought of budgets out of mind. If you challenge yourself to use cash or debit, you'll be more likely to keep your spending in line. Also, if you only make the minimum payments on your credit cards, you will be paying for that purchase "long after the usefulness is gone," Mr. Schwartz says. "If you do have to use a credit card, only spend what you can so you can pay it back within 60 to 90 days." He recommends limiting the number of credit cards in your wallet to only one or two.
Avoid impulse buying.
If you're trying to be credit cautious, it's important to avoid the dreaded impulse purchase. "Think about what you're doing before you make that purchase and if you find yourself thinking twice, there's probably a reason," says Mr. Schwartz. He recommends that buyers get into the habit of comparison shopping, either at different stores or online, instead of making a purchase in the heat of the moment.
Get family involved.
Many of us turn to credit to finance the demands of our family and children. That's why it's so important to make sure all the family members understand their financial reality. For example, you can explain to your kids that the Disney vacation is too expensive, but that they can research and suggest destinations that do fit within your budget. If they want a new pair of shoes that are above your budgeted amount, ask them to pay the difference from their allowance savings. "Involve them in the process," Mr. Schwartz recommends.