Announcing The Winner of Our Financial Literacy Scholarship (Spring 2022)
We are awarding $750 to a student every semester. All you have to do is show us how financial literacy has made a difference in your life.
Managing your debt can certainly be a difficult task. While it might be simple enough at first to deal with a handful of common credit card or personal loan debt, it can quickly get out of hand, especially when you aren’t making your payments on time and/or in full. That’s why it’s important to learn a little bit about some of the more popular debt management techniques available to all credit users. And, trust us, it’s better to learn about them now rather than later.
If your debt hasn’t gotten so out of hand that you need to consider more drastic measures, you can always start your debt tackling plan with these simple steps:
Your debt load might already be too heavy to manage. In that case, here are a few things you can try to get yourself out of it:
Collection agencies are hired to pursue individuals who have stopped making payments on their debts. These agencies may work for credit and loan companies. They try to collect either a percentage of the debt owed or, if possible, the full amount. There are also independent collection agencies who charge fees to collect debts, or buy the debt outright and try to collect it for themselves.
Here’s what’s likely to happen when your debt is handed over to a collection agency:
In Canada, there are regulations and laws that all collection agencies and debt collectors must follow. While some of these laws differ from province to province, here are some of the illegal proceedings you should look out for:
Click here to find out how you can stop collection harassment in Canada.
Total Debt Service Ratio (TDS) is a guideline that lenders use to evaluate your debt commitments compared to your income. Simply put, how much you owe in perspective to how much you make. This ratio is generally used to evaluate whether or not you can handle mortgage payments on top of your other debt obligations.
It displays the amount of cash flow that’s available in your pocket to pay all of your current debt contracts. The ratio is calculated using the formula below.
Having a ratio of anything less than 40% implies the borrower has an acceptable and standard level of debt.
Your debt-to-income ratio (DTI) compares your monthly recurring expenses with your monthly income. This is one of the many ways lenders evaluate whether or not you’re capable of repaying debts consistently. It’s calculated using the following formula:
DTI= Total recurring monthly debts / Gross monthly income
It’s in your best interest to have a low DTI, as it implies a good balance between debt and income and shows that you are a responsible borrower. You should aim for a DTI that is around 36% (lower if possible). If you have a DTI that is higher than 43%, you will have more difficulty getting approved for new loans and credit.
Your credit utilization ratio compares the amount of available credit you have to the amount you’re actually using. This ratio is specific to your credit usage. Let’s say you have a combined credit limit of $7,000 and your total balance (the amount you’ve used) is $4,000. Here’s how you can easily calculate your credit utilization ratio:
4000/7000= 0.57
This means that you have a credit utilization ratio of 57%, significantly above the recommended 30%. A credit utilization ratio higher than 30% will negatively impact your credit score and cause it to decrease, especially if it constantly stays too high.
Can’t figure out why your credit score dropped? Try reading this.
So far, we’ve explained how using credit responsibly is important if you want to qualify for the majority of credit products. Thus, the right amount of debt is not only required but also encouraged to a certain extent. In our next section, we’ll explain the difference between good and bad debt, as well as some ways of managing both types.
Some debt can be valuable and advantageous under certain conditions. Debts from purchasing certain objects and property that will increase your earning power are considered good debt. Good debt comes when credit is used in such a way that will benefit your future and generate long-term income. For instance, buying a house will put you in debt, but will also increase your overall earnings, because you can sell it and possibly make a profit.
More examples include educational expenses, small business ownership, real estate (property), and any long-term investments like stocks or bonds. In fact, if you’re handling your debt responsibly, meaning you’re making all your payments on time and in full, your credit score will increase, giving you a healthy credit report, credit rating, and credit history. In doing so, you’ll raise your creditworthiness, making it easier for you to be approved later on in life.
Want to learn how you can get a free annual copy of your credit report? Click here.
Generally speaking, consumer debt refers to credit card debt, as well as all other debt that will not generate any future value. This type of debt can be described as bad, although not all consumer debt is ultimately undesirable. Unfortunately, there is no exact definition of bad debt, as everyone’s financial needs are different. When we discuss bad debt, we mean any type of debt that is holding you back or creating financial issues for you. This is often consumer debt.
Loans Canada can help you match you with the right debt relief product and the best provider for your unique needs. If you’re interested, start by filling out an application here.
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