Debt is a fact of life. While we talk about living debt-free the truth is most people will at some point in their lives carry some form, or several forms, of credit. The trick to keeping your debt under control is to learn to borrow, and repay loans, wisely.
Here are some tips for using some of Canada’s most popular debt products in a handy infographic.
TRANSCRIPT and additional information:
Currently almost 5.6 million Canadians hold a mortgage. While a mortgage in an of itself is not really a bad loan, rising housing prices and over-extension is causing some concerns. If you take on mortgage debt:
- Don’t over extend yourself.
- Use the shortest amortization period you can afford.
- Understand any mortgage insurance costs that you sign up for.
- Always shop around and look for alternatives.
- Take advantage of making extra payments whenever possible.
- Don’t use your home equity to fund living expenses.
- Shop around with different mortgage lenders at renewal time.
Credit Card Debt
More than 9 in 10 Canadians have at least one credit card. If you use your credit as a payment mechanism and not as a form of credit, little harm can come your way. However used carelessly, credit card debt can become an onerous debt which become very difficult to pay off.
Our best tips if you do use credit cards:
- Understand needs versus wants.
- Don’t use it as credit. Only charge what you can pay for in full.
- Always pay off your balance in full by the due date.
- Ignore rewards. Rewards are NOT a reason to spend money on your credit card. Cards with no fees and low interest are a better option.
- Less is more. Carry no more than 3 credit cards, including gas or store cards.
Car loans are almost as common as a mortgage today. 12% of all non-mortgage consumer debt among Canadians can be attributed to car loans. When looking for a car loan:
- Buy less, not more than you can afford.
- Always compare different lending institutions.
- Read the fine print. Watch out for extras like insurance and penalties.
- Don’t assume a used car is the way to go. New car rates can be lower and save on maintenance.
- Don’t just look at the monthly payment. Consider the total you will pay over time.
- Shorter term car loans make for better long term value by saving you interest.
Lines of Credit
Lines of credit have become the new credit card. 26% of Canadians have an outstanding balance on a line of credit. While the rate can be lower than on a credit card, these types of loans also come with significant risks that you should avoid:
- Savings are a better emergency fund than a line of credit
- Avoid the interest trap. Interest only payments are not your best friend.
- Don’t get a secured line of credit unless you are adding asset value.
- If you don’t need it, lower your credit limit to avoid temptation.
Our best advice here – avoid payday loans entirely.
- Payday loans are an expensive, temporary cash flow fix.
- Build a small emergency fund as soon as possible.
- A cash advance or overdraft protection are better options.
- If you use payday loans regularly, talk to a debt expert about how to get out of debt or better manage your money.