Improve Your Credit Score – Part 2 of 3

If you haven’t got a recent copy of your credit report, and you are serious about building your wealth, I highly recommend investing the $15 to $25 to get one – you can gain instant access to your credit score information by using Equifax or Transunion.

Many times there will be errors on the report, outdated information such as place of employment, or inaccurate amounts (a $5000 line of credit might be reported as $10,000), or list credit cards that you may have forgotten about (remember when you bought some wrapping paper at Sears and they offered you 10% off if you ‘take five minutes to apply for a Sears credit account’?) Report any inaccuracies as soon as possible to the credit bureau by calling Equifax or Transunion. *If you find credit cards you’ve forgotten about or are not using – DON’T close them… more on this later…

Here is some information to help you build or rebuild your credit score (taken from “Applying the 7 Steps to a 720 Credit Score: How to win the credit card game” by Philip X. Tirone).

1. Keep your credit card balance under 30% of your credit limit at all times
2. Have THREE revolving credit lines/cards
3. Verify the accuracy of your reported credited limits (from Equifax and/or Transunion)
4. Have at least one active or paid installment loan on your credit report
5. Remove errors from your credit report (by calling Equifax or Transunion)
6. Negotiate for a letter of deletion before paying a bill in collection
7. Create a structured plan to protect your credit

In a nutshell, Credit Bureaus want to see a variety of credit activities to establish a score for you.

Regarding three credit lines/cards: The 3 major ones are best (VISA, Mastercard and American Express). Credit Bureaus award higher scores to people with at least three revolving credit cards that are actively used each month. If you do not have at least three, the credit bureaus do not have enough information to analyze your spending and payment habits, so they cannot assign your risk level.  Conversely, if you have too many credit cards, credit bureaus see you as having too many potential liabilities. If you have too many credit cards, instead of closing them, which can negatively affect your score, consider calling them to get the limits decreased to the lowest amount. That way you preserve your credit history (length or time you’ve had your account open) while lowering your debt to income ratio (if you have $10,000 in available credit, you will not be approved for more credit, so lowering your available credit to $1000 will help you).

If you go for secured credit (where you send $500 to the credit card company in exchange for a $500 credit limit), call them in 6 to 18 months of good timely payments to request that the secured card(s) be transferred to unsecured card(s), and for higher limits.

Another point to keep in mind is the choice between a card with an annual fee versus a higher interest rate. If you are paying the balance off each month, best to go with a higher interest rate. Remember to use ALL your cards each month, keeping the max balance on each one at under 30% of the limit at all times. Most banks/credit card companies offer an automatic payment option attached to your bank account, and will ensure you don’t have to worry about missing a payment if you’re away in Mexico!

Please check back in tomorrow for the second half of this blog, we will be discussing how to improve your credit score regarding installment loans.

This blog is part of our 10-day series “10 Days to Kick Start Your Financial Resolutions!” To read all the posts in this series, please click here. Enjoy!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Understand Your Credit Score (FICO Score) Part 1

Over the past 7 days we have focused on ways to reduce, eliminate and prevent bad debt, ie. debt that drains your income each month, as a cornerstone to building wealth. However, borrowing money is necessary to keeping the financial engine of the world running – to understand more about how this works, please view this video “Money as Debt“.

Having good credit can open many doors for you, whether you’re applying for a tenancy or shopping for a mortgage. So how do banks, credit card companies and other lenders determine whether they will lend to you, what limits to assign and what interest rate to charge? A lot of the decision is determined by your credit score or FICO score. (Note: FICO stands for ‘Fair Isaac Company’, which is the company that wrote the software that creates the credit scores).

FICO Scores are calculated from different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages below reflect how important each of the categories is in determining your credit score.

• 35% – Payment history
• 30% – Amounts owing (level of indebtedness)
• 15% – Length of credit history
• 10% – Type of credit
• 10% – New credit

These percentages are based on the importance of the five categories for the general population. For particular groups – for example, people who have not been using credit long – the importance of these categories may be somewhat different.

Payment History

• Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
• Presence of adverse public records (bankruptcy, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
• Severity of delinquency (how long past due)
• Amount past due on delinquent accounts or collection items
• Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
• Number of past due items on file
• Number of accounts paid as agreed

Amounts Owed

• Amount owing on accounts
• Amount owing on specific types of accounts
• Lack of a specific type of balance, in some cases
• Number of accounts with balances
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Length of Credit History

• Time since accounts opened
• Time since accounts opened, by specific type of account
• Time since account activity

New Credit

• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
• Number of recent credit inquiries
• Time since recent account opening(s), by type of account
• Time since credit inquiry(s)
• Re-establishment of positive credit history following past payment problems

Types of Credit Used

• Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

Please note that:

• A FICO score takes into consideration all these categories of information, not just one or two.
 No one piece of information or factor alone will determine your score.
• The importance of any factor depends on the overall information in your credit report.
 For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO score. Thus, it’s impossible to say exactly how important any single factor is in determining your score – even the levels of importance shown here are for the general population, and will be different for different credit profiles. What’s important is the mix of information, which varies from person to person, and for any one person over time.
• Your FICO score only looks at information in your credit report. 
However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.

Your score considers both positive and negative information in your credit report.

Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.

*This Blog info taken from the Credit Education Center, from My FICO

Although all Canadians can request a free copy of their credit score history and list of payments, open loans, etc. by writing and requesting the information, this free report does NOT reveal your actual score (between 300 and 900). Because lenders require a credit score of 720 (and some are now requiring a score of 740 – 760) to approve the highest loan amounts at the lowest interest rate, you’ll likely want to know your actual score. You can order your credit report online for between $15.00 and $25.00 through Equifax or Transunion. Read Part Two tomorrow “How to Improve your Credit Score”. We welcome your comments!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Prepare A Budget

Step One: Once you have tracked your spending for a couple of months, it is time to evaluate. Add up all the income from various sources (employment, business, investment income, etc.) and expenses (transportation, entertainment, housing, groceries, etc) and notice the result. It will be one of three scenarios: you will be spending more than you earn, breaking even or earning more than you spend. Although it may be scary to look at, especially if you know you have been overspending, the best way to get control is to first look at the numbers head-on.

Step Two: A good way to get a handle on any problem spending areas is to divide expenses into three categories and then code them as:
1) Necessities – expenses that cannot be avoided, such as utilities, housing, insurance, debt, emergency savings, investing
2) Adaptable – expenses that are necessary but can be adapted to fit a budget, such as groceries, entertainment, sports
3) Expendable – expenses that are luxury items, such as fashionable clothes, jewelry, designer coffee/restaurants, vacations (normally saved up for)

If you have been using the Tracking Sheet to record each time you spent money, you may want to use a highlighter to code each expense. You can also do this with your bank statement or credit card statement. For example, under “Transportation” you may want to use a blue pen for necessities, such as ‘car insurance’ (you can’t avoid car insurance – unless you choose to take the car off the road and bike, bus or lower the amount of coverage) and a yellow pen for adaptable such as ‘car wash’ – (it could be washed at home for free) and red for expendable, such as ‘cool new hubcaps’ (I shouldn’t need to spell this one out!)

Step Three: When you are clear on the amount of money that you have available to spend overall, first allocate the necessary amount of money towards items in the necessities category. Second, allocate money to purchase the adaptable purchases. What is left over can be saved and put towards the expendable items – it is very important to enjoy vacations, hobbies and treats – as long as they aren’t being financed!

Tips: To create more positive cash flow, look critically at your expenses. Some of the ones that seem necessary may not be. Are you really using that $75 gym membership where you go maybe 3 times a month? Could you start jogging with a friend instead, or join the local rec centre for $5 per drop in visit? What about your home? Are you paying for space you aren’t using, just to house clutter you don’t need? Could a basement be sectioned off, cleared out and turned into a revenue generating rental suite instead? Are you paying a premium for groceries for the sake of convenience? Consider researching which grocery stores have the best prices and buy food that is in season. Invest in tupperware and cook in large batches on Sunday to freeze meals for lunches and dinners on the fly throughout the work/school week.

Living on a realistic budget is both rewarding and empowering and puts you in the driver’s seat of your financial future.

This blog is part of our 10-day series “10 Days to Kick Start Your Financial Resolutions!” To read all the posts in this series, please click here. Enjoy!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Get The Family Involved

The most sound way to stick to a financial budget is to get the whole family involved. If the goal is to get out of debt or save for a new car or vacation, it is much easier and way more fun to stick to if all are on board. That way, when a child (or a spouse!) wants to buy a new video game, everyone can be reminded of the bigger picture. If only one person in the family is in control, it can create tension and not be very enjoyable for that person, setting the plan up for failure.

Ideally, spouses should both be in the know and in agreement about family income, expenses, net worth, investments, and the over-all estate planning. Children don’t need to know the big numbers, but they should be learning the difference between needs and wants, and that their contributions to the family finances are important. No matter what their age, children can chip in their time and know-how to help cook or clean up (helping to save money on restaurants or convenience foods), use fewer resources (heating and lights and water use to help save on bills), washing and vacuuming the car (save on those expenses) etc.

As soon as possible children should be becoming financially literate, starting with learning the difference between “saving”, “spending”, and “sharing”. To practice these principles with our son, we have begun using a system called “Three Jars“, which is an on-line piggy banking system to manage his allowance and other ’project-based’ income he earns. Our son is learning to manage his online account, save for big purchases, and discover how investing is rewarding. To learn more about how we have used Three Jars, please click here to read an earlier blog post.

When the whole family is involved, it is easier to be held accountable and decisions can be made together so that everyone wins. Remember, money is an empowerment tool!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Become Tax Savvy

Tax is the average Canadian’s biggest expense and the more informed one is, the better. When looking at investments and other income sources, understanding how they will be taxed is essential for strategizing, as well as preventing surprises at tax-time. Here is an overview of the most common types of tax:

1. Capital Gains Tax: A capital gain is the difference between a higher selling price over a lower purchase price, giving you a gain on your original investment. The capital gains tax states that your capital gains are subject to a 50% inclusion rate, making 50% of your profit included in your taxable income. That means that the other 50% is tax exempt. If instead of gains, you have losses, then you are able to claim your losses against your gains, which will reduce your total tax amount payable. Capital gains is considered to be an attractive income option.

2. Dividend Taxes: A dividend is a portion of a company’s earnings that is paid out to shareholders, often paid out quarterly. If you receive a dividend payment from a Canadian public company, then you are able to receive the enhanced dividend tax credit. Dividends are distributed to share holders after the company has paid its taxes, making dividends an attractive income option. The lowest tax bracket for eligible dividends is $35,859; in this bracket one would be entitled to a tax credit of 14.36% or $5149.00.

3. Tax on Interest Income: Interest earned on bonds, interest-bearing savings accounts, GICs, and private loans is included in interest income. This interest income is taxed 100%; if you earn $2,000 in interest this year, then $2,000 is added to your income and will be taxed at your marginal tax rate. It may be wisest to keep your interest income inside an RRSP or a Tax Free Savings Account (TFSA) because of its high tax consequences. *Tax on earned income or employment income is the same rate as interest income. These types of income are considered to be the least attractive, tax-wise.

4. RRSPs: Registered Retirement Savings Plans (RRSP) contributions are a common way that Canadians earning employment income can receive a tax deduction for the tax year that they contribute. What that means is that if you earn $50,000 per year, and make a $6000.00 RRSP contribution, you will pay tax on $44,000, instead of on $50,000. Funds sheltered within an RRSP are able to grow tax free, until the plan is converted into a Registered Retirement Income Fund (RRIF) and withdrawn in set amounts over time. The amount withdrawn will be taxed as earned income and taxed at your marginal tax rate, as if it were employment income.

This blog is part of our 10-day series “10 Days to Kick Start Your Financial Resolutions!” To read all the posts in this series, please click here. Enjoy!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Paying Off Debt

It’s that time of year again – and a major financial goal for many people is to ‘pay off debt’.   A positive motivator to get started is to know that having zero consumer debt (or bad debt) is very empowering psychologically, and for many is the foundation of wealth creation and financial independence. It is also sobering to remember that being held hostage by servicing debt payments while managing the extra costs in an emergency such as a health crisis or job loss can, at worst, spell bankruptcy, and at best, add to stress and/or depression.

When it comes to paying off debt, there are many routes to take; it is important to take into consideration the interest amount, the balance, and whether it is a good or bad debt.

The most common system to paying off debt is to pay off the highest interest loans first. This is mathematically the system that makes the most sense. Using this method, one should end up paying the least amount of interest possible. If you feel that this system would work well for you, then take a look at this calculator.

Many people believe that paying off the lowest balance to begin with is the best solution. This tactic is psychologically empowering as one can “check off” the debt from their list in a shorter period of time. If you enjoy watching debts disappear, and seeing immediate results, then this may be a more satisfying method of choice, which may motivate you to continue.

As good debt is tax deductible and is usually creating value through positive cashflow and/or capital appreciation, it is best to save this debt to pay off last. It is best practice to pay off bad debt first, (those debts that do not provide cash flow nor appreciate in value, such as credit cards or car loans).

Debt consolidation is another option. It may be possible to combine all debt into a home equity loan or line of credit, turning all debt into one loan. A consolidation loan usually offers a lower interest rate and smaller payments. If you are committed to getting out and staying out of debt, then debt consolidation may be a good choice for you. Debt consolidation allows you to have one balance, a consistent minimum payment, and consistent due dates, rather than keeping track of many different debts with different providers. The key to having this method work is to make consistent and substantial principal balance payments as well – a good rule of thumb to determine how much the extra principal payments should be, is the difference between the new lower minimum payment balance on the consolidation loan, and the amount that was already coming out of your pocket when carrying the higher interest debt. That way, it is less tempting to spend the ‘extra’ and is good practice for living within your means.

Ultimately, paying down debt is your choice and the plan to pay off your debt is only as good as you are at sticking to it. Be sure to make your debt-resolution SMART – Specific, Measurable, Achievable, Realistic, and Time framed!

This blog is part of our 10-day series “10 Days to Kick Start Your Financial Resolutions!” To read all the posts in this series, please click here. Enjoy!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Calculate It!

Our mission here at Share the Wealth is to help others build their financially literacy and be financially empowered, and we want to share a great resource that we recently found. Once you have tracked your spending for at least a couple of months and know where your money is going, it is time to take it a step further and calculate whether your money is working for you or against you and start to make some changes. Here is a list of 100 Financial Calculators that can help you with everything from calculating loan payments, to debt management, to investing – there are many useful tools on this list. To access the complete list of calculators, please click here.

There are a few calculators that we think are especially useful:

#36. Credit Card Minimum Payment Calculator: this calculator shows the true cost of just making the minimum monthly payment on credit cards (‘bad debt’ ie. debt that is costing you every month). Consider paying the full balance each month and making a commitment to only using credit cards when you know the have the funds to cover the full payment. For example, only use credit cards for the benefit of rewards points, cashback incentives, or immediate convenience where you can’t use cash or debit.

#35. Restructuring Debts for Accelerated Payoff: this calculator helps you determine your total debt payments, sorts debts from highest interest rate to the lowest, and then suggests an action plan for where to begin to pay off debts. It is a good rule of thumb to begin with ‘bad debt‘ first, then consider ‘good debt‘ ie. such as the mortgage on an investment property that creates positive cash flow. *Remember that paying down ‘good debt’ also means forfeiting your income tax deduction (interest paid on good debt is tax deductible, like contributing to an RRSP is) – depending on your personal situation this may or may not be right for you.

#50. Landlord Calculator: if you are thinking of buying a rental property – this calculator is very useful – as the decision should ultimately come down to the numbers. We believe that rental property investment real estate should produce monthly passive income or positive cash flow.  Rental properties that require low maintenance, and are in low vacancy locations that attract responsible tenants are ideal, as they have a higher probability of continuing to produce positive cash flow, even if the market goes south and the equity value drops or even becomes negative. This calculator takes into consideration the mortgage, interest rate, property tax, and PMI (this is the American version of CMHC insurance) among other things. A good rule of thumb is to be conservative – project lower rent rates than you expect, and higher mortgage interest, property management, vacancy allowance and repair costs. If you’re still in the black numbers-wise, you may have a winner!

These calculators are very helpful tools to help guide you in managing where your money is going and where it could be better allocated to help you preserve and increase your wealth.

This blog is part of our 10-day series “10 Days to Kick Start Your Financial Resolutions!”  To read all the posts in this series, please click here.  Enjoy!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Learn Daily

The more you educate yourself about financial matters, the wealthier you will become. Ongoing reading and putting ideas into practice is a necessary and enjoyable part of developing your financial literacy. As well, a positive attitude, solid values and disciplined organization are just as important to turn financial literacy into a financially independent lifestyle.

There are a number of way to educate yourself, including reading and listening to others that have more experience. If you would like to read some great financial books, you can refer to the “Suggested Reading List” on my website. If you don’t have a lot of time to sit down and read books, the iTunes library has many great books in audio format – these are excellent to listen to while driving or working out! Many of them are also available (in book or audio) at your local library. Another great free source of financial information is Your Money Radio, which broadcasts powerful, relevant, and practical money strategies that work.

To learn about finances in smaller doses, you can subscribe to and read many different blogs, such as Share the Wealth, Women’s Financial Learning Centre, and Million Dollar Journey. You may want to start reading the Business section of the Financial Post, the Globe and Mail or your local newspaper. Each week, on the Share the Wealth home page, we feature a different financial term – so you can check in there and learn a tidbit of information as well!

The more you surround yourself with financial terms and information, it will become less like the proverbial ‘Greek’ and more understandable and actionable. The hardest step is the first. Once you begin to spend some time each week reading financial books and blogs, it will become second nature and you’ll even enjoy it. If you know of any useful financial blogs, books, websites or other resources that help build and expand your financial literacy, please ‘share the wealth’ with us so we can pass it on to others!

This blog is part of our 10-day series “10 Days to Kick Start Your Financial Resolutions!”  To read all the posts in this series, please click here.  Enjoy!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Become Conscious!

The first step to owning your financial future is to become aware of your spending.  You need to know where your money is coming from and going to, in order to know how much money you have to cover your needs and wants.  To get clear on this, you simply track your spending.  Many of us have a mental block, usually ground in fear, around facing our spending ‘bogeyman’ head on.  It’s totally normal.  The key is to just commit to taking action and to following a simple plan.  From my experience, the easiest way to build wealth awareness is to methodically track spending by keeping a receipt from every purchase; whether you paid for the item using credit, debit, or cash, keep your receipts – put them on a spike, in a container, or in a file folder.  Then, on a weekly and monthly basis, go through your receipts and put them into categories such as car, groceries, toiletries, etc.  You can use our Monthly Tracking Sheet to record your category totals.  After the first two or three months of following this practice, you will have a good idea of where your money is being spent.  The most important aspect of this process is to simply observe your spending, not judge or shame yourself.  Watch for further blogs for the next steps.  To read more on tracking your spending, please read “Conscious Spending: Watch Where Your Money is Going”.

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.