Substantial debt a bad look for borrowers
While taking on a lot of debt is perilous in and of itself — especially considering the brutal interest rates on credit cards — Canadians also need to worry about the way their habits look to lenders.
Your “credit utilization” is the second-biggest factor that determines your credit score. It’s the total amount of revolving credit, including credit cards and lines of credit, you are using measured against the total amount of credit you have available.
So, if you have just one credit card with a $10,000 limit and you bought $5,000 worth of stuff, you’ve utilized 50% of your available credit. Most experts recommend that people keep their credit utilization rate at 30% or less to maintain a good credit score.
A high credit utilization rate can be a sign to lenders that you’re having trouble managing your finances. That can lower your credit score and make borrowing money in the future more difficult and more expensive.
If your utilization rate is on the high side, you’re not alone. The Borrowell study, which looked at almost a million clients, found the average Canadian rate was 43.5%. And, the recently released MNP Consumer Debt Index found more than three in 10 Canadians said their debt levels worsened during the pandemic.
Despite this, nearly a third say they plan to spend more than they usually would as the pandemic wanes and lockdowns end.
Keep your wallet full and score high
Last year, Canadian households saved an incredible $184 billion more than pre-COVID levels, according to an RBC report. This could help carry some families through a potential revenge spending spree.
For the rest, avoiding a buy now, pay later attitude is the best way to avoid financial damage. Here are a few other ways to lower your credit utilization and keep your credit score high.
Reduce your debt
Start by calculating how much debt you need to pay off to achieve a 30% credit utilization rate. You can do this by adding the credit limits on all your accounts and multiplying the total by 0.3.
If high interest rates are making it difficult to pay down your balance, consider taking out a debt consolidation loan.
These loans combine your debt into one single monthly payment at interest rates that are generally lower than what you’ll get with a credit card (though they can be higher than some other types of loans).
And if you have money mid-month that you can use to pay off some of your debt, don’t wait until the end of the month. That can also save you money on interest.
Increase your credit limits
Asking your provider to increase your limit will reduce your credit utilization, but it can be a double-edged sword.
Make sure your balance doesn’t grow alongside your limit, and be aware that inquiries about new cards or limit increases can also temporarily lower your credit score.
Applying for a new credit card or line of credit is another way to increase your total credit limit, but it comes with a similar caveat. If you use up this additional credit, you can end up in the same situation or worse.
At the same time, consider holding on to any credit cards or lines of credit you’re not using, assuming they don’t charge a monthly or annual fee. Old accounts help build your credit history — another factor in deciding your score — and closing them could do more harm than good.
Boost your income
Look for ways to increase your income in the short term. A second job, overtime hours, contract or freelance work can all bring in additional funds to pay off your debt.
If you don’t have time in your week for any of that, there are a few ways to earn a bit of extra scratch during your daily routine.
You might download a rewards app that offers real cash back — not points — from your regular purchases.
Or you can use a site that pays you in gift cards for watching videos and taking surveys — the sort of thing you might do in your off hours, anyway.