Great read recently, from Wealth Simple! Sometimes it’s challenging to keep up with all of the news and articles written about finances, debt, the economy, mortgages let alone the masses of emails I receive from lenders every day, but this article stuck out.

Wealth Simple has its Money Diaries (basically their blog) which are usually creatively written with a dose of reality. While technically Wealth Simple is a technology platform, I think they’re doing a fantastic job at conveying real life people and stories in a relatable way.

At first read, this is a couple with debt. A lot of debt. But are they really that different from your average homeowner? They may be in the US, but this same scenario could easily be playing out in households across Canada.

This quote from Tom really struck me: “I think education loans probably started us on this path. But credit cards got us in trouble.”

While the student loans were undoubtedly hefty, the credit cards are the more slippery slope. Lenders expect you to have credit. The best indicator of future repayment behaviour is your past repayment behaviour. However some forms of credit come with a high interest rates and they are readvancable. If borrowers tend to make payments only to re-advance the funds to make ends meet, they are paying a lot of interest, and getting no further ahead.

Are lenders part of the problem?

As a potential borrower, lenders follow the 2-2-2 rule when they look at your credit:

  • Do you have two active trade lines (ie. a credit card, a line of credit, a student loan – each are a trade line)
  • Reporting for at least two years on your credit bureau
  • With a minimum limit of $2,000

So, you’re encouraged to have at least two form of active credit. There is no benefit to carrying a balance month-to-month – not for your credit score or your wallet. Then why do so many borrowers carry a balance?

It could be “keeping up with the Jones'”, or maybe its naivety, either way, they’re not alone.

When I talk to borrowers, I take a hard look at their cash flow. I believe it’s part of my job to be honest with clients in terms of their budget. If buying this property, is going to lead to financial stress and hardship, we have that tough conversation.

None of us has a crystal ball, but take it from those who have walked this path before, proceed with caution. Consumer debt is a slippery slope, so ensure you have a strict repayment plan and try not to layer your debt – ie. having multiple loans, balances on credit cards etc. at the same time.

If you need some help to get yourself on a budget and get than debt paid down, contact me and I can set you on the right path, or introduce you to someone who can.

You can also check out some other posts like Good Financial Habits to Keep you Debt Free.