Your credit life is not

The marketing divisions in the financial industry have worked very hard to show us how to have it all and how to have it all now. After all you are worth it, aren’t you?

Whether it is a bottle of shampoo or a diamond, which according to the marketing people must be equal in value to three months salary - we can have it now. No one ever stops to ask if you can afford that diamond – and in many cases you cannot.

Everything today is sold as monthly payments and many of my clients have told me they gave little consideration to the total purchase price of an item. The only thing they thought about was how much the monthly payment would be. Studies have shown that one reason for using credit is not monetary at all, it is emotional. We spend money to make ourselves feel better and for a short time it does.

For many people however it is not their own money they are spending, and they get caught up in the spending - feel good cycle and many of them over spend and get into financial difficulty. Thereafter they can go through many emotional ups and downs - once they are in debt it can be very difficult to get out. In some cases the pattern may continue until they need to see a counsellor for assistance.

Why use credit

People have many reasons for using credit, but most can be classified into four main categories. We use credit for convenience, to obtain something before we have saved enough money to pay for it, to bridge the gap when our income is insufficient or irregular and occasionally to consolidate our debts.

Convenience

Many of us find it very handy to use a credit card instead of carrying cash, as well as to be able to pay just one bill – to the Visa or MasterCard Company. However, many Canadians have several credit cards and carry balances on them all from month to month. There are 44.1 million Visa and MasterCard’s in use in Canada. As long as you are able to pay the outstanding amount monthly, a credit card is an interest – free convenience. Some charge accounts (i.e. American Express) require you to pay your total bill each month, but others such as bank credit cards and retail revolving accounts, offer you a choice - you may pay all or only a portion of the debt. Having this option makes it quite easy to let bills accumulate and the interest rates these cards charge on unpaid balances is usually very high. A credit card also tends to encourage impulsive spending. Studies have shown that if we have to pay in cash we tend to spend less money.

To bridge the gap

Many people that have irregular incomes – use credit to pay for regular expenses until their next income cheque arrives. In this case I recommend that you discuss with your banker how to obtain a line of credit. A line of credit will give you the ability to have extra cash available for short-term use and lower rates than if you take cash advances on a credit card.

Consolidation loans

Sometimes when bills exceed income, people will go to their financial institution to apply for a consolidation loan. If they qualify for the loan they will borrow enough money to repay all their outstanding debts and just have one monthly payment.

Note: If you do not qualify for a loan on your own - I do NOT recommend that you get a co-signer. If you do you are bringing someone else into your financial troubles.

A consolidation loan may be helpful if you are disciplined and do not use your credit cards again or create any further debt until you have paid off the loan. However, it is my experience as a credit counsellor that this does not happen very often – many people will just continue using the cards and creating a bigger problem than they had before. So if you are using credit to live on and think you need help you may find that a Debt Management Program with a licensed credit counselling company like Solutions may be the answer to becoming debt free.

Debt Management Programs will affect your credit rating but unlike the diamond it does not last forever – your credit rating may be affected for up to three years from the completion of the program - this is a small price to pay to become debt free. Only deal with licensed qualified credit counsellors.