Credit and Christmas

As we get into the Christmas spending mode, I thought I would throw out my thoughts on credit cards. I know we don't live in a perfect world, so take what you can from below.

Credit card companies are in the business of making money, lots of it actually, and their money is made by charging high rates of interest on money you borrow and don't pay back within 30 days. So when at all possible, take advantage of the convenience of using a credit card, but pay the account to zero before the no interest period expires (usually within 30 days).

If you use a credit card, and can't pay the card to zero within the “free” period, make sure you ALWAYS pay the min required payment by the payment due date. As well, make sure you NEVER carry a balance on the card over 75% of the cards limit.

In Canada, all credit cards report to credit agencies such as Equifax or Trans Union. It is these agencies who track your history and rate your credit history with a credit score. In general, an excellent score is 800, an average score 675, and anything under 600 will be problematic when you need to borrow money.

If you pay the credit cards min payment past the due date, not only are you charged interest on the money owed, the credit card can(and does) report to these agencies on whether or not you paid on time. If you pay the minimum payment or more on time, you are rated an “R1”, if 30 days late an R2 etc. The more frequently you are late the greater the negative affect on your credit score.

If you carry a balance on the card over 75% of its limit (even if you pay the minimum payments on time), the credit bureaus algorithm will also use that to class you in a higher risk category, and therefore reduce your score further.

In borrowing money today, the approval of your loan or mortgage has become almost completely dependent on having a good credit score from these agencies. So it is more important than ever to be conscious of your credit habits. In my opinion, everyone should personally check their credit bureau every year or so. It is your information they are storing, and you have a legal right to know what that information is. Take a look at the links below, what they know may surprise you!
http://www.consumer.equifax.ca/home/en_ca
http://www.transunion.ca/ca/personal/creditreport/consumerdisclosure_en.page
Both Equifax and Trans Union offer a free report, and though it doesn’t show your score, it still shows you all the information they hold. A credit bureau with your score is also available, but with a cost.

So in a nutshell, live within your means. I’m not saying if you don’t have the money don’t buy it, but simply be aware that credit will always come with a cost if not managed wisely. I have seen the consequences far too many times in my business and my personal life. Use credit wisely and it can allow you to take advantage of opportunities that arise, use it foolishly, and it will impact your borrowing ability for years to come.