Debt-Free Forever (11 page)

When you are reducing your credit limits, do not reduce your limit to the point where your balance is greater than 60% of your limit. Part of the credit scoring system looks at how much of your limit you’ve used up. The more often you bump your head against your limit, the lower your score. That’s why paying off $50 and then immediately lowering your limit by $50 can do more harm than good.

When it comes to cancelling a card, first make sure you’ve redeemed all your rewards (cuz they are
hi-sto-ry)
and also make sure there is a zero balance on the account. If the sales rep promises you her first-born to keep the card, stand your ground. Remember, you’ve already chosen the card (or two cards, at most) that you’re going to keep.

Send written confirmation of your request to cancel to the card issuer and keep a copy on file. Fax it if you can so you have a record of its receipt. Ask for written confirmation of the account being closed.

Once you receive confirmation that the card has been cancelled, wait six to eight weeks and then check your credit report. Remember, it’s your responsibility to verify that your credit report is accurate.

GAIL’S TIPS

While it can be pretty dramatic to simply cut up your cards, doing so does nothing to close the account. However, if you want to avoid the temptation to use a card you’re committed to cancelling, nothing beats a pair of scissors!

Whether you pull a copy of your credit report to verify a closed account or to identify areas in your history that may be causing problems, everyone should check their credit report at least once a year. Your credit history is recorded in your credit report maintained by Canada’s two major credit-reporting agencies: Equifax Canada and TransUnion Canada.

A credit report is a “snapshot” of your credit history and is the primary tool lenders use to decide whether to give you credit. Your credit score is a judgment about your financial health. It indicates the risk you represent for lenders, compared with other consumers. Most credit-reporting agencies use a scale from 300 to 900. The higher your score, the lower the risk for the lender.

One way credit-reporting agencies report on your credit history is by using a scale of 1 to 9. A rating of 1 means you pay your bills within 30 days of the due date. A rating of 9 means that you never pay your bills or that you have made a consumer debt repayment proposal to the lender. A letter will also appear in front of the number: for example, I2, 02, R2. The letter stands for the type of credit you are using.

•
I:
instalment loan, such as for a car loan, where you borrow money once and repay it in fixed amounts, on a
regular basis, for a specific period of time until the loan is paid off.

•
O:
open credit such as a line of credit, where you borrow money, as needed, up to a certain limit and the total balance is due at the end of each period. Student loans can also fall into this category because the money may not be owing until you are out of school.

•
R:
revolving credit, on which you make regular payments in varying amounts depending on the balance of your account, and can then borrow more money up to your credit limit. Credit cards are revolving credit and
R
ratings are most commonly used.

GAIL’S TIPS

If you always pay on time, your account will be coded an R1. If an amount was written off because you never paid it back, it will be coded R9. Here are the ratings most often used.

•
R00:
Too new to rate; approved but not used.

•
R1:
Pays (or paid) within 30 days of payment due date or not more than one payment past due.

•
R2:
Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due.

•
R3:
Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due.

•
R4:
Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due.

•
R5:
Account is at least 120 days overdue, but is not yet rated 9.

•
R6:
This rating does not exist.

•
R7:
Making regular payments through a special arrangement to settle debts.

•
R8:
Repossession (voluntary or involuntary return of merchandise).

•
R9:
Bad debt; placed for collection; moved without giving a new address; or bankruptcy.

While the
R
ratings let lenders see just how good or bad you’ve been with your credit from one month to the next, your credit score takes your history into account along with a number
of other factors, and we’ll look at these in more detail in Chapter 12.

Whether you did it as an act of desperation or you were just dumber than a sack of hammers, your decision to go to a pay-advance loan store is costing you big-time. Do whatever it takes to get out.

The pay-advance loan biz has been growing by leaps and bounds. They say they’re providing a service: helping people who can’t find help anywhere else. Really? Well, if they’re so interested in “helping” people, then what’s with the fees, the outrageous interest rates, and the never-ending cycle?

Interest is charged from the day you take the loan until the loan, and all the fees, are repaid in full. I have worked with people who have been paying anywhere from 700% to 1,000% when all the fees are added in. Ouch!

Colleen and Jason ended up in a pay-advance store after a slew of unfortunate events. Colleen’s daughter, Lila, stepped on a broken piece of glass and had to be rushed to hospital. Colleen ended up taking five unpaid days off work, setting the couple back $830 that week. Lila also needed a prescription: $76. With no emergency fund and no savings, Jason decided that a pay-advance loan was the only way to make rent. He took a loan for $1,500. In one week, he would be required to repay $1,727.55. He figured he’d get an extra couple of shifts at work to come up with the $227.55 in interest and fees.

But a week later Jason blew a tire on his truck. He realized
that if they repaid the $1,727.55, they would have no money for food, so Jason did the repayment and then took a new pay-advance, again borrowing $1,500 to get him to the end of the week. He worked an extra couple of shifts to cover the $227.55 in interest and fees, fully intending to pay the whole thing off.

Since Colleen thought Jason had paid off the pay-advance loan after the first week, she went ahead and used some of the “extra” money in the bank account to get Lila a couple of new things she needed. Colleen got her hair done too. When Jason went to do the pay-advance repayment they were short again. And there were no more overtime shifts at work for the month. Jason paid back the loan by taking yet another advance.

Three months later they were still in the pay-advance cycle, each week paying $227.55 in interest and fees to borrow the $1,500 they needed to keep them afloat.

If Colleen and Jason kept borrowing for the entire year, that pay-advance loan would cost them $11,832.60 in interest. Hey, if you don’t believe me, do the math yourself: $227.55 × 52 = $11,832.60. So, to use $1,500 of someone else’s money for a year, Jason and Colleen were on the hook for almost $12,000 in interest.

So what do you do if you’re in the cycle and are desperate to get out? You’re going to have to suck it up and either

• be short for a couple of weeks while you repay the loan and don’t borrow again, or

• find a way to make more money so you can get the life-sucking debt off your back.

There ain’t no other way, kids. You’ve just got to get serious about getting out of debt and do whatever it takes to break the desperate cycle of borrowing and then borrowing again to make up for the cash flow shortage caused by the outrageous interest and fees charged. It’ll be hard. It’ll hurt. But you’ll have learned an important lesson, and you won’t do that again.

This is a product that has been badly named. It should be called Too Lazy to Keep Track Protection because that’s exactly what it is. It’s designed for people who don’t want to have to be bothered with making sure they have enough money before they go shopping. I’ve met hundreds of people who live in overdraft, while their banks giggle with glee.

Overdraft protection is usually sold to people when they open their accounts as a way to ensure that bounced cheques don’t ruin their credit ratings. When you try to spend money you don’t have in your account, the bank covers the withdrawal—be it a cheque, debit, or cash withdrawal—by the amount available in your overdraft protection agreement. The more overdraft protection you have, the more money you can unconsciously spend without having to worry about NSF charges and bounced payments.

Don’t confuse the kind of overdraft protection you buy, for which you sign an agreement, with what some banks call “bounce protection” or “courtesy overdraft protection,” which they offer to save you from the embarrassment or hassle of a returned cheque or a declined debit card transaction. Unlike
regular overdraft, which charges a monthly fee and interest on the amount you’ve “borrowed” (the amount of your overdraft), the fee on “bounce protection” is levied regardless of the amount you go into overdraft for. It can be astronomical when you calculate it as a percentage of the “loan.” One woman wrote me to say that she was appalled when her statement came in and she had more than $160 in bounce fees.

I hate all kinds of overdraft protection. I hate the idea that overdraft protection gives people a licence to ignore their cash management. They can spend whatever they want, whenever they want, because overdraft protection is there to catch them like a safety net.