Leah Drewcock, CIRP, LIT, Senior Vice-President, MNP Ltd.

Leah Drewcock, CIRP, LIT, Senior Vice-President, MNP Ltd.

Smart Credit – Is it more important than good credit?

By Leah Drewcock, CIRP, LIT, senior vice-president MNP Ltd.

What is smart credit?

Smart credit is using credit that you can afford. It is more than just being able to afford the monthly payments. It is being able to afford to pay the amounts you owe in full, over a reasonable amount of time. A reasonable amount of time for consumer credit, such as credit cards, lines of credit, and unsecured loans, is the ability to pay the balance owing, due in full over a five-year period. For mortgages these are often amortized over 25 years, which is reasonable.

To further complicate things, you could have a stellar credit rating but be completely paralyzed by mounting debt. Your overall financial health is not measured by your credit rating alone.

Credit is just a tool. Like any tool, if used properly, it can be helpful, but if used improperly it can cause serious damage.

Take the following example:

John has a credit score of 730/900. John is married with 2 kids. John has two credit cards, a line of credit, a car loan and a mortgage. John never misses a payment on his debts. He pays his mortgage and vehicle loan payments every month and he is paying the minimum payments on his two credit cards. He pays interest only on his line of credit.How would you rate John’s financial health?

What if you found out that after making his payments on his debts, paying his utilities and taxes and vehicle expense John has $200 left for expenses, like groceries, before his next payday? How healthy are John’s finances?

The warranty recently ran out on John’s truck and he just found out he has $1,000 repair bill for the engine. He just finished making all his payments and needs his vehicle to get to work, and to go to the grocery store. John knows that he can pay $300 of the repair on his card because he just made a $300 payment, he can also can pay part with cash (and not get groceries this week) and he is hoping the repair shop will let him make payments on the remainder of the repair bill.

Now how healthy do you think John’s finances are now?

Having emergency savings to pay for an unexpected expense or ride a temporary employment setback without relying on credit is a much better indicator of financial health.

Smart use of credit

  • Take stock and determine your credit needs
  • Don’t apply for credit from multiple lenders (you only need one credit card)
  • Use a mix of credit products (credit card, line of credit, car loan) rather than one type such as a credit card (stay away for payday loans and high interest finance loans)
  • Don’t use all the available credit on your cards (don’t max out or exceed the limit)
  • Make payments on time, and pay more than the minimum payments on credit cards and lines of credit
  • Review your credit report every six months and fix any errors
  • Set a budget, include debt repayment and emergency savings as budget items

In the example above John appeared to have good credit, but not smart credit. If John had paid down his credit cards and set aside emergency savings on a monthly basis, he would be in a much healthier financial position to handle an emergency car repair. He would probably be less stressed too!

If you are at, or near your credit limit, what would happen to you if you had to get your car fixed, or your income is cut because you get sick? The creditors are still going to expect their payments, and the fact that you have made payments on time every month and have a good credit rating may be irrelevant.

You are not alone, there are professionals who can help.Many people have found relief through MNP Ltd. – Licensed Insolvency Trustees who will take the time to understand your current situation and provide personalized solutions to meet your exact needs.

Finances

Just Posted

Participants of the Indigenous-led agricultural training program pose for a photograph with the staff at Tea Creek Farm in Kitwanga. (Photo courtesy, Alex Stoney)
Indigenous-led food sovereignity program trains first cohort in Kitwanga

Tea Creek Farm trained participants from northwest B.C. First Nations

The Red Chris open pit mine approximately 80 km south of Dease Lake. The province and Tahltan will start negotiations on the first consent-based decision-making agreement ever to be negotiated under DRIPA with regards to two mining projects in northern B.C. (Newcrest Mining photo)
B.C. to begin DRIPA-based negotiations with Tahltan First Nation on two northwest mining projects

Negotiations on Red Chris and Eskay Creek mines to commence soon in accordance with Section 7 of DRIPA

Columnist Steve Smyth (File photo)
One for the road: Columnist Steve Smyth signs off

After nearly 60 years of residency, this will likely be the last… Continue reading

The site of the new Mills Memorial Hospital project in Terrace on June 18, 2021. The provincial government is so far choosing not to comment on suggestions a new Mills Memorial Hospital will now cost in excess of $600 million. (Ben Bogstie/Terrace Standard)
Province silent on Terrace hospital construction cost

Health ministry urges citizens to stay tuned

The City of Terrace is setting up a town hall meeting to address the ‘crisis’ in the downtown area. (Black Press Media File Photo)
Terrace council declares crisis in downtown

City staff are in the process of setting up town hall meeting

Marco Mendicino, Minister of Immigration, Refugees and Citizenship during a press conference in Ottawa on Thursday, May 13, 2021. THE CANADIAN PRESS/Sean Kilpatrick
Canada to welcome 45,000 refugees this year, says immigration minister

Canada plans to increase persons admitted from 23,500 to 45,000 and expedite permanent residency applications

FILE – Most lanes remain closed at the Peace Arch border crossing into the U.S. from Canada, where the shared border has been closed for nonessential travel in an effort to prevent the spread of the coronavirus, Thursday, May 7, 2020, in Blaine, Wash. The restrictions at the border took effect March 21, while allowing trade and other travel deemed essential to continue. (AP Photo/Elaine Thompson)
Feds to issue update on border measures for fully vaccinated Canadians, permanent residents

Border with U.S. to remain closed to most until at least July 21

A portion of the George Road wildfire burns near Lytton, B.C. in this Friday, June 18, 2021 handout photo. THE CANADIAN PRESS/HO, BC Wildfire Service *MANDATORY CREDIT*
Blaze near Lytton spread across steep terrain, says BC Wildfire Service

Fire began Wednesday and is suspected to be human-caused, but remains under investigation

Blair Lebsack, owner of RGE RD restaurant, poses for a portrait in the dining room, in Edmonton, Friday, June 18, 2021. Canadian restaurants are having to find ways to deal with the rising cost of food. THE CANADIAN PRESS/Jason Franson
Canadian restaurateurs grapple with rising food costs, menu prices expected to rise

Restaurants are a low margin industry, so there’s not a lot of room to work in additional costs

RCMP crest. (Black Press Media files)
Fort St. John man arrested after allegedly inviting sexual touching from children

Two children reported the incident to a trusted adult right away

Barbara Violo, pharmacist and owner of The Junction Chemist Pharmacy, draws up a dose behind vials of both Pfizer-BioNTech and Oxford-AstraZeneca COVID-19 vaccines on the counter, in Toronto, Friday, June 18, 2021. An independent vaccine tracker website founded by a University of Saskatchewan student says just over 20 per cent of eligible Canadians — those 12 years old and above — are now fully vaccinated. THE CANADIAN PRESS/Nathan Denette
At least 20% of eligible Canadians fully vaccinated, 75% with one dose: data

Earlier projections for reopening at this milestone didn’t include Delta variant

This undated file photo provided by Ernie Carswell & Partners shows the home featured in the opening and closing scenes of The Brady Bunch in Los Angeles. Do you know the occupation of Mike Brady, the father in this show about a blended family? (Anthony Barcelo/Ernie Carswell & Partners via AP, File)
QUIZ: A celebration of dad on Father’s Day

How much do you know about famous fathers?

Emily Steele holds up a collage of her son, 16-year-old Elijah-Iain Beauregard who was stabbed and killed in June 2019, outside of Kelowna Law Courts on June 18. (Aaron Hemens/Capital News)
Kelowna woman who fatally stabbed teen facing up to 1.5 years of jail time

Her jail sentence would be followed by an additional one to 1.5 years of supervision

Most Read