It’s National Financial Literacy Month (FLM), where the Financial Consumer Agency of Canada (FCAC) helps equip Canadians with practical tools and tips to manage their money in a changing world. Throughout November, the FCAC is discussing the ever-changing financial marketplace and the importance of checking up on financial health.
At Magenta, our goal is to connect people with opportunities to build a better tomorrow. This month, we’re furthering our goal by supporting National Financial Literacy Month and sharing resources dedicated to helping Canadians:
- manage their money and debt wisely;
- save for the future; and
- understand their financial rights.
For this week’s theme, “Check up on your debt”, we’ll be discussing the importance of checking up on debt, how mortgages can help, as well as sharing helpful resources for debt management. Whether you’re an investor, a broker, or simply looking to refresh your financial literacy, we hope this article proves useful to you.
Why is checking up on your debt important?
Debt history plays a critical role in forming an impression when interacting with financial institutions. Your ability, or lack thereof, to handle debt speaks volumes about you to prospective lenders who may consider the following:
- Are you reliable? Are you someone who can be counted on to make regular payments?
- Are you capable of planning ahead, such that your finances show little fluctuation, even when unforeseen expenses rear their head?
- Are you diligent, able to stick to a budget and live within your means?
Your financial history will determine how trustworthy you are in the eyes of a lender and is a key determinant of the interest rates you will pay, or even if your loan is approved in the first place.
However, not all debts are created equal. As industry professionals, we know that some debts are more important than others. Debt can be an indicator of a borrower’s ability to uphold their end of a mortgage. For example, when it comes to credit card balances, if you consistently pay down only the minimum amount each month, this can affect your credit score and interest rates accordingly. Minimum payments can be an indicator of an inability to pay down more. Furthermore, even if you consistently pay down your balance entirely, incurring high balances negatively impacts your debt-service ratio (your ratio of your debts to your income), and thus, your credit score in turn. As a rule of thumb, a high balance is considered somewhere in the range of spending over 75% of your limit.
On the other hand, payments made over the span of many years, namely mortgages and other kinds of instalment debt (such as vehicle loans), are often less significant factors. This is due to the debt relative to your income being spread out over a larger period of time. In general, the lower the interest rates and the more flexible the payment schedule for a debt is, the less impact it will have on how lenders consider your applications.
How can a mortgage help me manage my debt?
Debt consolidation is a technique in which one exchanges two or more smaller loans for a single larger one. you gain the financial power to pay off your smaller loans. By acquiring a long-term loan, such as a mortgage, you gain the financial power to pay off your smaller loans. A mortgage can help you:
- Streamline your records;
- Make it easier to budget and plan;
- Have a lower interest rate than the average of your previous smaller debts; and
- Lower your interest fees and monthly payments in the long run.
Debt consolidation is one of many tactics to get a drop in your outstanding payments, but it’s only as good as the budget you set to help you pay off your long-term loans. To help you plan your budget, consider using an automated tool such as the Budget Planner offered by the FCAC. It’s fast, easy to use, and best of all: completely free!
Options you can trust to help you manage your debt
Equipping yourself with the knowledge and resources to tackle debt can be beneficial to your overall financial planning. Below, we’ve compiled some options you can use to help you manage your debt:
- Making a plan to manage your debt
- Complete a debt assessment
- Infographic: Check up on your financial health
To learn more about how to manage your debt and how to get help, please visit canada.ca/money.
You can also read the first FLM blog for information on how to get a pulse on your financial health.