Proper use of credit is part of sound financial management. Credit can be a financial tool, but use it sparingly or you might find yourself in serious financial trouble.

A misused credit card could end up being the biggest threat to your future situation. For instance, if you only pay the minimum on a $1,000 credit card balance at 18.9% interest, it will take more than 20 years to pay it off and you will have paid over $1,000 in interest.

Play it safe when it comes to credit
Don’t be impulsive. Before using credit, ask yourself the following questions:

Do I have the means? According to financial advisors, no more than 20% of your net monthly income should go to paying off debt (excluding your mortgage). Example:
Net monthly income: $4,500
Mortgage: $800
$4,500 – $800 = $3,700 multiplied by 20% = $740. That is the most you should be putting toward credit, including credit cards.

Is that really the final cost?
To get the real final cost, you have to add taxes and interest to the purchase price. Always ask yourself if the item is a productive or unproductive asset and what effect it will have on your net worth.

Is it a need or a want?
Is it really a necessity or is it a splurge?

Your credit report
Your credit report shows all your loans, your credit history and your ability to meet your monthly obligations. If your credit score is low, most financial institutions won’t give you a loan.

Things that affect your credit report

  • Paying off debt late or not at all
  • Negative credit history
  • High ratio of debt to earned income
  • Number of applications for loans from credit institutions

How to find out your credit score and improve it

  • Pay your bills and the balances on your credit cards on time.
  • Maintain minimal debt.

You can obtain a copy of your personal credit report and find out your credit score for a fee in real time online. The report will also provide a detailed explanation of your credit score and how lenders perceive your credit history. Simply visit the Equifax Canada consumer services website or call 1-800-465-7166 for more information and to request a copy of your credit report.

Recommendations on managing your credit

  • Keep only one or two credit cards. Cut up unwanted cards and return them to the issuer.
  • Pay off your credit card balance every month.
  • Pay for things in cash as much as possible or try making a large down payment.
  • Compare prices and negotiate interest rates down. Ask your creditor how you can pay your loan off more quickly.
  • Avoid putting up collateral or taking on a loan.

You have credit problems if:

  • You only pay the minimum amount due on your credit card every month.
  • Your payments are late.
  • You borrow to pay for day-to-day expenses.
  • You borrow to pay off other loans.
  • After paying your mortgage or rent, you put more than 20% of your income toward other debt.

If nothing changes, you may end up in serious financial trouble.