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MNP's TAKE: With the Canadian economy verging on financial crisis, it's no surprise to learn thousands of Canadian households are struggling to keep up with the cost of living, on top of trying to stretch income from one debt payment to the next. In efforts of holding onto a few extra dollars, many Canadians are only paying the minimum required amount on the debt payments they are managing. While this might seem like an effective plan for keeping creditors at bay, in the long run, it only leads to further financial devastation as interest continues to accrue and debt becomes unmanageable.
When you're performing a financial balancing act, creating a comprehensive budget and establishing a plan for paying down debt may not only be low on the priority list, but may even seem impossible. That being said, taking the time to sit down and document all of your debt payments, financial obligations and income will give you a clearer idea of where you're at and where you need to be in order to position yourself for a stronger financial future. If there is room in your budget to cut costs (think cable bills, coffee runs, or doing a comparative analysis of grocery costs from one store to another), you may be able to make more significant payments towards your debt. Consider making the more concerted efforts to high-interest debts as they can be the most financially debilitating. Just think, with a detailed budget, a little bit of compromise and a strategic plan, you may be able to position yourself for a debt-free future!
If debt has already started to take hold and you feel trapped, you have options. Depending on your unique position, there may be several options available to help get you on track to achieving a fresh financial start so you can get back to planning for your future comfortably. Contact Grant Bazian, CIRP, LIT, President of MNP Ltd. at 778.374.2108 or [email protected] for information on what debt solutions are available to help you.
Canadians who regularly make more than the minimum payments on their debt are less likely to fall into delinquency – but more than a third of consumers aren’t certain about the benefits of paying a greater amount, according to research released Wednesday by TransUnion.
The global survey included 1,010 responses from Canadians, 88 per cent of whom said they frequently pay more than their minimum monthly requirement for credit cards or similar revolving debts like lines of credit.
But 39 per cent of the Canadians surveyed weren’t certain about the benefits that come with making more than the minimum monthly payments on their debt.
In the United States, this uncertain proportion of the population is lower at only 25 per cent.
TransUnion, a credit-monitoring agency based in Chicago, suggests that the trend-focused data could paint a more accurate picture of consumers for potential lenders than traditional credit reports, which capture consumer data at a single moment in time.
That is, it better recognizes a consumer’s ability to pay down debt rather than simply apply a number to what they owe.
If more Canadians recognize this and boost their minimum monthly payments, TransUnion says, it could make more favourable rates and terms available to a wider swath of the population.
The survey comes at a time when low interest rates have Canadians holding record amounts of debt. In the third quarter of 2016, Statistics Canada found that households in this country owed $1.67 for every dollar of disposable income.
Debt can be an important tool for building wealth over time, but “using debt as a part of cash flow is only helpful when you can pay it down,” says Andrea Thompson, a senior financial planner with Raymond James Ltd.’s Coleman Wealth in Toronto.
Ms. Thompson says the survey results demonstrate the need for cautious debt management as part of a broader financial plan, which is more prudent than dwelling on credit scores.
Brandon Hill, a certified financial planner and founder of A Life of Wealth advisory service in Toronto, often works with young clients, for whom credit scores can seem mysterious.
“They often have the misconception that as long as you pay off your minimum balance, your credit score will never be affected,” Mr. Hill says. “And while that might be true, we’re not just looking to maintain the status quo.
What you want to do, especially as a younger person, is enhance that credit – pay off more, pay down debt faster.”
TransUnion has incorporated the real-time trended data into its Canadian credit-score offerings since 2015. Using a metric called “total payment ratio,” or TPR, it attempts to correlate payment amount and delinquency. It’s calculated by dividing consumers’ total monthly debt payments across their credit cards by the minimum required.
The higher the TPR, the less likelihood of delinquency: someone who pays $1,000 when the minimum that month is $200, for instance, has a TPR of five. TransUnion’s study found that higher TPRs are correlated with lower delinquency rates, both for credit cards and auto loans.
As such, the company suggests incorporating these metrics into credit-score calculations could increase the proportion of consumers in the high-end “super prime” category to 21 per cent, up from 12 per cent, allowing them to borrow with more favourable terms and rates.
“This may sound intuitive: consumers who are able to pay more usually have more liquidity and therefore are less likely to miss payme nts,” said Ezra Becker, Transunion’s senior vice-president and head of global research, in the press release. “But it is the quantification of this intuition that is important.”
Domestically, TransUnion Canada competes with Equifax Canada for credit reports. Equifax has also begun incorporating trended data into credit-score calculations; in January, its global parent company released a similar analysis suggesting that trended data could give 1.5 million consumers better access to credit each year.
The TransUnion survey was conducted with Modus Research and public-relations firm Weber Shandwick. It was based on a random sample of 1,010 Canadians at the ages of 16 or older, and was weighted by age, gender and region.
This article was written by Josh O’Kane from
The Globe And Mail and was legally licensed through the NewsCred publisher network.
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