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This is the second in a two-part series about responsible credit management after an insolvency. If you haven’t already, you may also want to read part one:
Preparing Yourself Beforehand, to make the most of these insights
Managing credit is more than just making payments when they’re due. It’s a process of planning and preparation that trains you to be intentional about your credit use and prevents you from making impulsive or unsustainable credit decisions.
Imagine two people preparing to run a marathon: One has been training for months. She’s been steadily increasing the frequency, distance and pace of her runs each week leading up to the big day. She knows precisely how far she can push her body, the best times to accelerate and hold back and what it will take to reach the finish line.
The other person signed up for the race just last week. He went out and bought a new pair running shoes and has only gone for a few light jogs. He doesn’t know the marathon route — let alone the challenges it will throw his way — but assumes he can figure it out as he goes.
Who do you think has the better chance of crossing the finish line?
Managing your credit well is not a hundred metre dash — it’s a lifetime commitment. There will be challenges, but if you manage the process well from the beginning, you can push through any bump in the road and be successful.
Consider how thoughtful you’d be about requesting a $5,000 loan from your sister. Would you think long and hard about what you need that money for, how urgently you require it and what other options you have available? Would you only spend it on the most urgent expenses and make every effort to pay it back and quickly as possible? Why?
You know it’s not your money. Your sister is trusting you to do the right thing. You have a relationship to nurture and a reputation to uphold.
A credit card, line of credit or personal loan is no different. But — and be honest with yourself — have you been that intentional with those tools in the past? With access to a faceless, invisible source of funds it’s easy to forget that, too, is not your money — or that you have a relationship to nurture with your creditors and a reputation to maintain in the form of a credit score. It’s easy to see how careful spending can quickly fly out the window.
Responsible credit use is understanding the difference between
having money and merely having
access to it. Yes, there’s an added level of accountability and care that comes with borrowing money from someone you know personally. But debt is debt. Understand that it’s not your money and you will be much more mindful how you spend it.
Credit mastery is about setting clear boundaries. And no boundary is more black and white than your credit limit. Remember: high limits invite high balances — and high balances inevitably lead to financial mismanagement.
Just because you qualify for multiple cards or higher credit limits does not mean you have to accept them. Consider these three questions to determine what’s appropriate for you:
What’s the maximum value you can afford to repay within one month? You can prevent unsustainable debt by never allowing your balance to exceed your disposable income in one billing cycle.
Why are you thinking about taking on more debt? You must be able to make a clear, logical argument for whatever credit limit you have or want. Increasing your limit because you’re currently maxed out or wanting more credit ‘just in case’ are both slippery slopes that can lead to unsustainable debt.
What’s your gut telling you? If you feel anxious or uncertain about increasing your limit or taking on new debt, that’s a strong indicator you should either hold steady — or even reduce your current credit availability.
Let your spending plan and common-sense be your guide. You have no obligation to give in to persistent or high-pressure sales tactics. Opting against increasing your limit despite an available offer will not adversely affect your credit rating. And if you ever feel uncomfortable with your current credit limits, you can always request your creditors to lower them.
More to the above, it’s important to recognize that credit limits are horrendously deceptive. They have almost nothing to do with your ability to pay the full balance in a reasonable timeframe. In fact, most financial institutions base
maximum credit limits on the likelihood you will consistently make your
minimum payments each month.
We’ve all seen that line at the bottom of a credit card statement that reads, “It will take you 16 years and 45 days to pay this balance in full if you continue to make the minimum payments.” Encouraging you to spend more than you can afford is precisely how lenders keep you locked in the cycle of debt.
Reject the idea that having multiple cards with high limits and then racking up those cards make you a good credit manager. It’s just the opposite. Consistently paying your balance off each month and having enough left over for living expenses makes you a good credit manager.
Most financial planners agree that no matter your limit, staying below 30 percent of your total available credit at any given time is critical to keeping your payments manageable. So, if you have a $500 credit limit, aim to stay within a range of $0 to $150.
What’s better than paying off your credit card at the end of every month? Paying off every purchase the moment you make it! In fact, that’s hands down the best way to simultaneously build and manage your credit.
There’s a persistent myth that you need to carry a regular balance on your credit card to build your credit — or to build it faster. But it’s simply not true. Occasional yet consistent credit use is highly effective for achieving the result you’re looking for.
Why not try this strategy:
When you’re writing your monthly budget, identify what recurring expenses you could pay using your credit card and set those funds aside as you normally would. Go ahead and make the payment, then transfer the funds
immediately — and put the card away until its time to pay your bill again next month.
You’ll need to be diligent for this to work, however. There’s a straight and dangerous line that stretches between “I’ll do it later,” to, “I forgot… and I accidentally spent that money on something else.”
We have a limited view of the future at best. Sure, we might have an idea of some things around the corner — recurring bill payments, an upcoming tax refund a potential raise or bonus. But how many of those things do we
know for certain? Maybe a cold month causes a higher than average heating costs, a poor quarter at work forces a wage freeze or the car breaks down and requires several hundred dollars to fix.
Relying on expected earnings to pay off a current purchase is a recipe for financial turmoil. The only guarantee is the money you have in your account
right now. Just because there
appears to be money in your budget for a credit payment doesn’t mean you can afford it. Circumstances can change on a dime and the further you try to forecast, the more likely it is something will arise to torpedo your best intentions.
Salespeople live by a common expression: “Underpromise. Overdeliver.” Use this same sentiment with your credit. Any time you consider borrowing money, expect things will get in the way of paying it back. Spend less than you think you can afford — and if you run into the best-case scenario, you’ll have enough money to pay your debts and still set some aside for when the worst-case rears its ugly head.
You have all the tools you need to be a stellar credit manager. You build a comprehensive spending plan every month. You’re committed to funding a deep pool of emergency savings. You’ve intentionally curated your credit products and selected limits based on your income and lifestyle. And you’re honing the discipline to pay off your balances in full each month and charge only what you can afford right now.
Remembering credit is not your money and that it becomes debt the moment you use it will prevent regretful spending. Like that marathon runner who trained consistently and methodically for months before her race, preparing thoughtfully and learning the best ways to manage your credit will help you achieve success in the long run.
There will be ups and downs along your journey. But if you pace yourself and always keep the debt free finish line in mind, you’re going to be unstoppable.
Based out of Surrey and the Fraser Valley,
Linda Paul is a Licensed Insolvency Trustee and Senior Vice President at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 310.DEBT (310.3328) or toll-free at
Based out of Courtenay,
Selina Jacobson is an Assistant Estate Manager at MNP LTD. To learn more about how MNP Debt can help, contact our local office at
1.877.363.3437 or toll-free at 310.DEBT (310.3328).
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