5 Common Credit Myths Busted

Wouldn’t it be great if all Canadians had an excellent understanding of credit scores? Unfortunately, that isn’t the case. With financial literacy lacking in the school system, most of the knowledge we receive about credit scores is secondhand from family and friends. Sometimes that information is right, sometimes it’s not.

Let’s take a look at some of the most common Canadian credit score myths and help dispel them once and for all.

Myth #1: I’ll Hurt My Credit Score by Checking It

This is false in most cases. If you’re checking your own credit score or credit report using a free or paid service, then it won’t affect your credit score. However, if you’re applying for a new credit card and the bank pulls your credit report, that can drag down your credit score.

That’s because there are two main types of credit inquiries, “soft” and “hard” credit inquiries. Soft inquiries like checking your own credit report aren’t noted on your credit history and therefor don’t affect your credit score, while lenders and credit card companies do a hard inquiry, which is tracked on your credit history, to determine how much credit they can offer you.

Too many “hard” inquiries can make it look like you’re shopping around for credit – which can be a red flag for lenders.

This brings us to Myth #2…

Myth #2: All Credit Reports Are The Same

In Canada we have two different credit bureaus: TransUnion and Equifax.

Consumers are typically listed with both, though the information can vary between the two depending on how the companies you do business with report credit and payment histories. You can get your free TransUnion credit report online here and your free Equifax credit report here. Both companies also offer credit monitoring, which can be a good investment if you’re concerned about identity theft or fraud.

Both companies also offer several different views or versions of an individual credit report to businesses. Depending which view a business is using, they may see a different score. This is true for free online credit scores as well, as Marketplace reported in October 2019.

Myth #3: I’ll Improve My Credit Score by Lowering My Credit Limit

Again, this is false in most cases. One important factor that determines your credit score is your credit utilization. That’s a fancy way of saying how much of your available credit you’re using.

A good rule of thumb is to keep your credit utilization below 35%. For example, if you had a credit card with a $10,000, you’d want to keep it below $3,500 (35 percent) at all times. When it gets above 50 percent lenders tend to get nervous that you could be running into financial difficulties.

Giving yourself some breathing room makes sense for most people, but if you’re someone who knows you’ll spend right up to your limit if it’s available, you might be better off with a lower credit limit. Just be aware it’s likely to hold back your credit score – although that’s better than having a large balance on your credit card next month!

Myth #4: I’ll Help My Credit Score by Closing Old Accounts

Do you have a credit card in your wallet that you haven’t used for a while? Your first instinct may be to close it, but did you know that could actually hurt rather than help your credit score? That’s right, if you have a long history of making your payments on time and in full, by closing this credit card, your credit score is likely to take a hit.

You may be wondering why. The reason is simple. The length of credit history is another factor that comes into play with your credit score. When you close an old credit account, you’re shortening the length of your credit history, so it’s best not to do in most cases. The only time it may make sense is if you’re barely using a credit card and it comes with a hefty annual fee. Otherwise, you’re most likely better off keeping it open.

Myth #5: When Does An Old Bill go into “Collections”?

Everyone knows that having an item in collections will have a seriously negative impact on their credit report. But we recently helped a client who had an item in collections – and she didn’t even realize it.

Because the debt was with an internal collections team and hadn’t been transferred to an external agency, she didn’t realize the overdue bill was now considered as “in collections”. But that was what the credit bureau was reporting, and what was holding her back from getting more credit when she needed it.

If you want to learn more about which credit myths might be holding down your credit score, contact one of our credit consultants for a free consultation. They can review your credit report with you and help you find the right tools to grow your score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

The First-Time Home Buyer Incentive: Everything You Wanted to Know About Shared-Equity Mortgages

With the federal election coming up on October 21st, home affordability is a hot topic for Canadians. Home affordability is such an important issue because it’s the single most costly household expensive for most Canadians. When your shelter costs are high relative to your income, you can find yourself “house rich, cash poor,” with very little left over to save, let alone have fun.


To help address home affordability, the Liberals introduced the First-Time Home Buyer Incentive. The First-Time Home Buyer Incentive is a shared-equity mortgage, a relatively new concept to most Canadians. Let’s take a closer look at the Incentive and how it may help with home affordability.

What’s a Shared-Equity Mortgage?

Shared-equity mortgages may not be something you know very well and that’s understandable. Shared-equity mortgages aren’t very widespread in Canada, but that could soon change if the Incentive proves popular.


A shared-equity mortgage is a mortgage where the lender (or the government for the Incentive) puts money towards your down payment. But instead of it being a loan that you have to pay back right away, the lender or government takes an ownership stake in your home.


The main benefit of a shared-equity mortgage is that it helps make the carrying cost of your home less costly and more affordable. That’s because your mortgage payments will be lower, not to mention you’ll pay less in mortgage default insurance (insurance you’re required to buy when making less than a 20 percent down payment on a property in Canada).


But there is a downside to that. As mentioned, the government owns part of your property. Depending on how much your home goes up in value over the years, a shared-equity mortgage could end up costing you a lot. That’s because not only will you have to pay back the original amount you borrowed, you’ll also have to pay back a portion of how much your home has gone up in value. (Although the silver lining is that in most cases you won’t need to pay back any money while you’re still living in the home. It’s only when you sell the property or you’ve been there 25 years that you have to repay the shared-equity mortgage).

Who is Eligible for the First-Time Home Buyer Incentive?

As mentioned, the First-Time Home Buyer Incentive is a shared-equity mortgage. A “shared-equity mortgage” can be offered by any lender, and for the Incentive, the federal government is using this existing financial tool to provide a top-up to a home buyer’s down payment, if they’re putting down less than 20% on a property.


The Incentive has been accepting applications since September 2nd, 2019 with the first closing taking place November 1st, 2019 – the application info is available here. Using the Incentive, if your household has a combined income up to $120,000 you’re able to receive 5% from the Incentive towards a resale home and 10% towards a new home. (In case you’re wondering, yes, you can withdraw the money from your RRSP under the Home Buyers’ Plan).


As the name suggests, you have to be a first-time homebuyer to participate in the Incentive. That means that you’ve never owned a home before, you haven’t occupied a home that you or your spouse or common-law partner owned, or you’re going through a marriage breakdown or breakdown of a common-law relationship.


Using the Incentive you can spend up to $565,000 on a property. This scenario is assuming you earn $120,000 per year and you’re purchasing a new home. That’s equal to four times your annual income and the Incentive amount. If your income is lower or you’re buying a resale home, your maximum purchase price under the Incentive would be lower.

To address the lack of affordable housing in Toronto, Vancouver and Victoria, the federal government has since introduced a new version of the Incentive. If you’re buying in those markets, you’d qualify to spend almost $800,000 on a property and could have a combined income of up to $150,000.

Does the Incentive Make Sense for Me?

If you’re someone struggling to save up a large enough down payment the Incentive is worth considering. It can help you get into a home sooner rather than later and start building up equity, not to mention it can save you in mortgage default insurance premiums.

Are you looking to rebuild your credit score to qualify for a better mortgage rate? Contact our offices today for tips on achieving a good credit score.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

How Do You Protect Yourself in a Data Breach?

You’d like to think you’ll never be involved in a data breach, but the sad reality is that data breaches are happening all the time these days. A quick search online will bring up plenty of recent examples. Personal information that may be compromised in a data breach includes names, dates of birth, addresses, SINs and even credit card details. That begs the question, how do you protect yourself? Thankfully there are things you can do to be protect yourself if you’re ever a victim. Here are four simple ways to protect yourself in a data breach.

Fraud Alert

The first thing you can do is place a fraud alert on file with the credit reporting agencies Equifax and Transunion. A fraud alert is a great way to protect yourself in the event of a data breach. When a creditor pulls your file, they’re supposed to take extra precaution before approving your credit application. That means calling you on the phone to confirm your identity. This should help stop anyone who tries to a fraudulently use your personal information to obtain credit.

Credit Monitoring

While fraud alerts helps immensely, another way you can protect yourself is by signing up for credit monitoring. With credit monitoring, you can regularly check your credit history. Although it won’t stop fraud, it’ll help you spot anything suspicious. If you see anything fraudulent on your credit report, you can report it to the police.

Change Passwords

Sometimes it’s not just your name, address and personal details that are compromised. If you use your online password for more than one website, your other accounts could be compromised too if the fraudsters gain access to your email address or bank account. As such, it’s a good idea to change any of your passwords associated with the data breach. It’s better safe than sorry as the saying goes.

Credit Card Alerts

Credit cards alerts are another great way to prevent fraud. Usually there’s a bit of lag between when a data breach is discovered and when it’s made public by the company involved. As such, your credit card details may have been stolen without you even knowing it. However, by adding an alert on your credit card, you can help protect yourself. You can add an alert by text message or email every time someone makes a purchase on your credit card. If it’s too much, you can set it up so you only receive an alert for purchases over a certain threshold.

Most of us don’t check our credit card statements every single day, but by setting up alerts, you’ll know right away if someone is going on a shopping spree at your expense instead of days or weeks later.

Are you looking for other ways to protect yourself in the event of a data breach? Contact our offices today for some assistance.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Going Back to School Without Breaking the Bank

Can you believe it’s almost that time of year again? You know what time I’m talking about – the “most wonderful time of the year.” No, I’m not talking about the holiday season; I mean back to school.

While back to school can be an exciting time for parents, it can also be a costly time. The last thing you want to do is start the school year in debt, but with the list of must-haves for children getting longer and longer every year, keeping your back to school budget in check is often easier said than done. Thankfully it is still possible.

Here are some ways to go back to school without breaking the bank.

Plan Ahead

Did you know that people who go to the supermarket without a shopping list are more likely to spend more than those who go with a shopping list in hand? It shouldn’t come as a surprise. Those with a shopping list know exactly what they’re going to buy. They can get in and out, without the temptation to wander and wonder what they need.

You may be wondering what the supermarket has to do with back to school shopping, but the two have more in common than you think. Similar to going to the supermarket, you want to plan ahead for back to school shopping. Take the time to do an inventory of what your child already has. That way you won’t end up buying supplies like pencils, pens and paper that your kid already has a ton of at home.

Once you know what your kid has, create your list together with your child. This can be a great learning experience for them. They can help you choose the items that they need, while still working within the budget you’ve set for them, teaching them a valuable money lesson.

Shop Around

For basics like pens and papers, there’s nothing wrong with heading to your local retailer, but if you’re going to be buying anything expensive or anything in large quantities, it’s worth spending the time to shop around. By shopping around, you can see if there are better details to be had out there.

And don’t just limit yourself to brick and mortar stores. See if there are better deals to be had online. You may be surprised about the deals available out there.

Share with Other Parents

Buying in bulk can save you money, but what if it’s way too much of something like pencils and you’re afraid your child isn’t going to be able to use them all even when they graduate from university? You might consider going in “halfsies” and split the cost with another parent. By doing that you can still get a great deal on an item and not end up with way too much of it. It’s a win-win situation for everyone involved!

Start Shopping Early

Don’t make the mistake of waiting until the day before school is back in session to go shopping. Not only could the supplies you need to be sold out, you’re probably not getting the best deals on them either. By planning ahead of time, at the end of July or early August and starting your back to school shopping early, you’ll save money (even if your kids don’t like hearing about back to school so early on in the summer).

Are you looking for other ways to save on back to school? Contact our offices today for more great savings tips.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Identity Theft: What It Is and How to Prevent It

Identity theft is a growing problem in Canada. Every year thousands of Canadians fall victim to it. While the Internet and computers have made our lives easier in a lot of ways, it’s also made it easier for fraudsters to steal your personal and financial information. The good news is there are ways you can protect yourself. Let’s take a look at what identity theft is and how you can prevent it.

What is Identity Theft?

Identity theft is the deliberate use of another person’s identity, usually for financial gain. Identity theft comes in all different shapes and sizes. It can be something as simple as stealing someone’s mail or more sophisticated like hacking into your computer. Even companies aren’t safe from data breaches. There have been countless stories of personal data breaches over the years.

The aftermath of identity theft can leave you in financial ruins. Not only could fraudsters ruin your credit, but you could also suffer thousands of dollars in losses. This can hurt your ability to get credit later on when you need it if you want to get a mortgage or car loan.

How to Prevent Identity Theft

You don’t just have to sit idly by hoping you aren’t the victim of identity theft. There are things you can do to be proactive and prevent it. You should be extra careful about handing over personal and financial information, especially your address, date of birth, social insurance number (SIN) and credit card information. If someone were to obtain those online they could assume your identity.

Without further ado here are our best tips on how to prevent identity theft.

Safeguard Personal Information

Be extra cautious when sharing your personal information. Examples of sharing personal information include buying goods online and filling in an application for employment. Before willing handing over your personal data, you should ask why it’s needed and how it will be used.

Be even more careful with your SIN. If your SIN ends up in the hands of fraudsters, your credit could be damaged. Unless your SIN is absolutely required, it’s best to leave it off a form.

Protect Your Wallet or Purse

Hold onto your wallet and purse and keep eyes on them at all times. A criminal will have hit the jackpot if they obtain them. When you bring your wallet or purse with you, it’s a good idea to leave as much of your personal data at home. For example, don’t make the common mistake of bringing your SIN card everywhere with you. Only bring it when you truly need it.

Be Cautious with Your Credit Card

You should be cautious when sharing your credit card information with anyone. Although the majority of credit cards have zero liability protection where you aren’t at fault if your credit card is fraudulently used, it’s still a good idea to be proactive and takes steps to prevent it from happening in the first place.

Although it’s convenient, don’t save your credit card information directly on websites. If the website is ever hacked, your credit card information could be stolen.

Also, only share your credit card information with companies that you trust. Don’t ever give it to an incoming caller unless you’re 100 percent certain who it is.

Looking to rebuild your credit after being the victim of identity theft? Contact our offices today to come up with a game plan.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Ways Parents Can Help Adult Kids Buy a Home Sooner

For Canadians in most parts of the country, spring had a later start than usual. Whether your adult child is looking for a home this year or is planning to purchase a home in the coming months or years, it’s never too early for them to get their finances in order.

Buying a home isn’t as easy for kids these days as it was even a decade or two ago. High home prices coupled with the mortgage stress test means that it’s tough to even afford a starter home in a decent location. This had led to a lot of parents helping out their adult kids financially to afford a home.

Let’s take a look at some good ways parents can help adult kids buy a home sooner.

Gifting the Entire Down Payment

The first way to help out your adult child is by gifting them their down payment. If you’re in the financial position to do that, gifting them their down payment can let your adult child buy a home in a decent neighbourhood sooner. Maybe they’ll even choose a place close to you. You might do what is called “living inheritance,” when you gift your adult child part of their inheritance when you’re still alive.

A word of caution about this – gifting your adult kid their down payment is fine as long as they appreciate it and it won’t set you back financially. As much as you want to help, gifting your adult child their down payment shouldn’t set back your retirement or involve taking out a reverse mortgage on your home. If that’s the case, maybe you can to help them in other ways.

Matching Down Payment Money

If you can’t afford to gift your adult child their entire down payment or you’re afraid they won’t appreciate it as much as they should, you might consider only gifting them a portion of their down payment. This can be done in several ways.

Personally, my favourite way is to match your adult child’s down payment. This helps your child work towards their down payment and incentives them to save. For example, if your adult child saves $10,000, you’ll match it with $10,000 of your own. This can help them get in the good habit of saving later in life.

A variation of matching is topping up your adult child’s down payment. For example, if your adult child saves 15 percent towards a down payment, you’ll top it up by 5 percent to help them avoid mortgage default insurance (this adds up to a 20 percent down payment). It’s a really nice gesture!

Living at Home Longer

There’s no shame in not being able to afford to gift your adult child money. However, a way you can really help them out is letting them live at home longer. This lets your adult child “supercharge” their down payment since they won’t be paying market-level rents.

If you do this have a serious conversation with your adult kid ahead of time. Explain why you are letting them live a home. Set rules and responsibilities. Let them know any chores they are expected to do and how long this arrangement will last. Emphasize that you’re doing this to help them save a bigger down payment sooner. That way they’re less likely to blow their extra money on frivolous things.

There are several ways to do this. You can let them live at home and charge them below-market rent. You could also choose not to charge them any rent at all. Regardless of how you do this, by getting your adult kid on board, it will help make this a win-win situation for both parent and child.

Are you not sure the best way to help your adult kid with their down payment? Contact our offices today to come up with a good savings strategy.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

How to Read and Understand Your Credit Report

In my last article, I looked at how do you update or dispute information on your credit report. However, it’s tough to spot an error on your credit report, especially if you don’t know how to read it in the first place. Being able to read and understand your credit report is a vital skill to have. If you don’t know how to read it, you won’t be able to spot any potential mistakes. This can hinder your ability to obtain credit with the most favourable terms and conditions.

Let’s take a look at how to read and understand your credit report.

Reading Your Credit Report

There are two major credit reporting agencies: Equifax and TransUnion. Each has its own credit report. You can request one for free from each every 12 months. It’s a good idea to do that because one may be different than the other. For example, some lenders only report to one credit reporting agency. Likewise, one credit report may have an error, while the other doesn’t. Although the credit report format is slightly different, they both convey similar information.

At the top of your credit report, you’ll find personal information to identify yourself, such as your name, any aliases you go by, date of birth and social insurance number. Below that, you’ll find your address history and employment history. You’ll want to review to make sure it’s accurate.

A section you’ll want to pay extra attention to is any recent credit inquiries. If there are any creditors you don’t recognize, you’ll want to inquire with them. This could be a sign of identity theft – when someone steals your identity and tries to fraudulently apply for credit in your name.

Understanding Debt Ratings

There are so many different types of credit – car loan, credit card, line of credit, student loan and mortgage, to name a few. To make it easier to keep track, Equifax and Transunion have assigned the credit types with debt ratings. The codes are made up of two parts: a letter and a number.

The letter stands for the type of credit it represents.

I is for “installment loans” like car loans. An installment loan is any money borrowed as a lump sum for a specific timeframe to be repaid in fixed amounts or installments on a regular basis until the loan is repaid.

M is for “mortgage loans” like the mortgage on the home your family lives in. A mortgage is a lot like an installment loan. You typically spread the repayment over 25 years, making regular payments on a monthly basis.

O is for “open status credit” like lines of credit. You can borrow money as you need it up to your credit limit. You only need to pay interest on the amount that you borrow. Often you make interest-only payments to keep your account in good standing.

R is for “revolving or recurring credit” like your credit cards. This is the most common type of credit. Revolving credit is a lot like open status credit. You’re required to make a minimum payment based on the amount you borrow. Your minimum payment is usually a flat dollar amount or a percent of your outstanding balance.

Your debt rating also comes with a number. It can be between 1 (the best rating) and 9 (the worst rating to have). If you have a 1 rating on all your credit types, it will go a long way to boosting your credit score. If your credit score is higher than 1 too many credit items, it could negatively impact your credit score.

0 – Too recent/new for a rating; or approved, but not yet used

1 – Paid within 30 days of billing; pays as agreed.

2 – Payment 31-59 days late.

3 – Payment 60-89 days late.

4 – Payment 90-119 days late.

5 – Payment more than 120 days late, but not yet rated “9.”

6 – N/A

7 – You make regular payments under a special arrangement, such as a consolidating loan, with a credit counselling agency.

8 – The property has been repossessed

9 – The debt has been written off as “bad debt” and/or it has been sent to a collection agency; or you’ve filed for personal bankruptcy.

Let’s put them together. If you had a debt rating of R1, it means you have a credit card where you always make at least the minimum payment on time. However, if you have a M3 rating, it means that you have a mortgage where you’ve made a payment at least 60 to 89 days late.

There you have it. How to read and understand your credit report in a nutshell!

Need some help understanding your credit report? Contact our offices today. We’re happy to walk you through it.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Why You Should Stress Test Your Own Finances

Interest rates have been low for the better part of a decade, but just because they’re low now, it doesn’t mean they’ll stay low forever. Although it doesn’t look like the Bank of Canada is going to be raising interest rates this year, who’s to say our central bank won’t raise interest rates next year or the following year? The Bank of Canada has raised interest rates five times since mid-2017 and it could very well do it again in the future. How do you prepare your family for possible interest rates hikes? You can do that by stress testing your family’s finances.

Let’s take a closer look at stress testing and why it’s important.

The Mortgage Stress Test

When you hear the term “stress test,” probably the first thing that comes to mind is the mortgage stress test.

The mortgage stress test was introduced on January 1, 2018, to protect homeowners from rising interest rates. Anyone buying a home putting down at least 20 percent must pass the mortgage stress test. The mortgage stress test makes you qualify at a mortgage rate higher than the actual mortgage rate you’re signing up for.

The stress test requires you to qualify at the greater of your mortgage rate plus two percent and the Bank of Canada’s five-year benchmark rate (currently at 5.34 percent). For example, if you’re applying for a mortgage with a rate of 3.39 percent, you need to qualify at 5.39 percent, since 3.39 percent plus 2 percent is higher than 5.34 percent.

The mortgage stress test was mainly brought in to cool the overheated real estate markets in Toronto and Vancouver, as well as protect homeowners from higher mortgage rates when their mortgages come up for renewal. What if mortgage payments were 2 percent higher when your mortgage came up for renewal, could you handle it? That’s the all-important question the mortgage stress test answers.

Applying the Stress Test to Your Other Debts

Although the stress test is a term most often associated with mortgages, it’s a good idea to also apply it to other debt that you’re carrying, especially any debt with a variable interest rate. For any debt with a variable interest rate, you’ll feel the effects right away of an interest rate hike. If interest rates on your line of credit or personal line tied to prime rate were to rise 2 percent, could you handle the new payment? That’s the question you should be asking yourself.

Although you won’t feel the effects right away of an interest rate hike to any of your debt with a fixed interest rate, it’s still important to stress test it, as you could face a higher payment when your term ends and you need to renew.

Taking Stress Testing a Step Further

If you want to take stress testing a step further to ensure you’re prepared if and when higher interest rates arrive, you can pay your debt as if interest rates are already 2 percent higher. By doing that you won’t feel as much of a shock when interest rates eventually rise, not to mention you’ll save lots on interest by paying more than you need to at present interest rate levels.

Need some help with stress testing your own finances? Contact our offices today. Our credit consultants are happy to help.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Lines of Credit versus Personal Loans: Which Should I Choose?

You want to borrow money, but you’re not sure the best way to do it. You know a credit card doesn’t make sense since it will be a large expense that you plan to pay off over an extended period of time. You’re thinking a line of credit or personal loan makes sense, but you don’t know which one is best.

Let’s take a closer look at lines of credit and personal loans and when you might want to choose one over the other.

What’s a Line of Credit and When Might It Make Sense?

Lines of credit are loans that allow you to borrow up to a predetermined limit. A line of credit is quite flexible. You’re able to borrow as much money as you need and pay it back on your own schedule (when you’re approved for an interest-only repayment schedule).

A line of credit is revolving credit. This is just a fancy way of saying that you’re able to borrow against it whenever you want and pay it off on whenever you like without applying for a new loan. Lines of credit don’t have a specific date you’re required to pay them back in full. Instead, you can pay them off on a schedule that works with your finances. (However, the longer you take to pay off your line of credit, the more you’ll pay by way of interest.)

With a line of credit, you can make interest-only payments, making your payments more affordable. Also, you’ll only pay interest on money that you’ve borrowed. (You’re charged interest only on the money you withdraw from your line of credit, not on the credit limit itself.)

Lines of credit can make the most sense for both short- and long-term borrowing needs. For example, if you’re looking to consolidate debt and you may need to borrow more money down the line, a line of credit makes a lot of sense. You’ll be able to borrow more money later on without applying for a new loan.

Likewise, if you’re planning to borrow money for a major expense, such as a costly home renovation, or you’re planning to borrow money on an ongoing basis (i.e. for a serious of home renovations), then those are other instances when lines of credit can make sense.

What’s a Personal Loan and When Might It Make Sense?

A personal loan is a loan in a fixed amount that you agree to pay back over a specific time period by way of instalments. Loans usually need to be paid back over six to 60 months.

Loans are less flexible than lines of credit. If you need to borrow additional funds or you’d like to extend the repayment period, you may need to apply for a new loan.

The monthly payments on loans tend to be higher. Unlike lines of credit where you can make interest-only payments, the payments on loans must consist of interest and principal. Also, unlike a line of credit, you’re charged interest on the total loan amount the moment you take out a loan, regardless of when you use the money.

Loans make the most sense for specific needs, like paying for a vehicle or a one-time home renovation. If you don’t plan to borrow any more money, a loan can make a lot of sense.

A loan is also handy for those who lack financial discipline and prefer a fixed payment schedule. With a line of credit, it can be tempting to make interest-only payments, but by doing that, you’re no further ahead. With a loan, you’re required to make interest and principal payments. Because of that, your minimum monthly payment is higher, helping you pay off the loan sooner and save on interest.

Are you still not sure whether a line of credit or personal loan makes the most sense for you? Contact our offices today. Our credit consultants are happy to help.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Canadian Household Debt on the Rise: What Does it All Mean?

It’s hard to pick up a newspaper these days and not see at least one headline about the elevated debt levels in Canada. If you find yourself in consumer debt, at least you’re not alone. But is all the worry really justified? Is Canadian household debt bordering on excessive or is the fear overblown?

Let’s take a closer look at Canada’s household debt situation and what it all means.

The Debt to Income Ratio Hits a New Record

If we focus on just the facts, the facts don’t lie – Canadian household debt is on the rise. Together we owe $2.16 trillion in debt. As a share of GDP, Canada has the dubious honour of having the highest debt load of the G-7 countries.

How did we as Canadians find ourselves in this situation? Low interest rates for the better part of a decade have encouraged Canadians to go on a borrowing binge.

A popular way to measure household debt is the debt to income ratio. The media loves to use this in attention grabbing news headlines. The debt to income ratio looks at your total debt compared to your income. To calculate your own personal figure, add up all your debts – your mortgage, car loan, line of credit, credit card debt and any other debt you might have – and divide it by your net (after tax) annual income. Multiply that figure by 100 and voila, you have your own debt to income ratio!

As of the fourth quarter of 2018, the average Canadian’s debt to income ratio rose to a record 174%, up from 148% a decade ago.

But there’s no guarantee interest rates will stay low forever. The Bank of Canada has already increased interest rates five times since mid-2017. Although it looks like our central bank has taken a pause with respect to further rate increases, if rates were to continue to rise again in the future, many Canadian families who are already feeling the squeeze from higher interest rates, might feel even more of a squeeze if and when higher interest rates arrive.

Is It All Really So Bad?

At first glance Canada’s debt situation looks pretty dire. While the total debt figure and the debt to income ratio may look scary, those are only two measures of household debt. Another important measure is your ability to service your monthly debt.

To calculate this figure, add up how much debt you have each month. This is debt you’d have to pay even if you were on holidays laying on a beach, sipping an umbrella drink. This includes your mortgage, car payments, minimum credit card payments and minimum student loan payments. Then calculate how much your household brings in on a monthly basis. This includes your salary, your spouse’s salary and any extra income you earn on the side.

Take the debt figure and divide it by your income figure and multiply by 100. Ideally, you want to keep this figure below 40 percent, although if you’re living in a city like Toronto or Vancouver where the cost of living is higher, that number could creep as high as 50 percent (although lower is better). Anything over 50 percent and it should raise the alarm bells. In that case, you should look to cut back on your fixed expenses.

The Bottom Line

When I was paying off my house, my debt to income ratio was almost 450 percent and I was fine. That being said, if your debt to income ratio is high and so is your monthly debt figure, then that should be an area of concern.

Confused about these numbers? Contact us today. We’re happy to walk you through them and help you get on the right financial path.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.