Debt is Good

I often hear clients, friends, and the general public tell me about how they are in debt and miserable about it. This post was written for the purpose of dispelling the myth that it is bad to have debt. In fact, I hope that by the end of this article you think about how you can use debt to your advantage. The truth is:  you can use other people’s money to help build your financial future.

Types and costs of debt

There are many types of debt in today’s world and they all have different borrowing costs associated with them. Based on the effective annual interest rates you need to pay a creditor, you can classify debt as either cheap or expensive. Cheap debt is an amount borrowed at a very low interest rate, and expensive debt is the opposite, money borrowed at a high interest rate. Have a look at some of the types of debt and their costs below.

Type of Debt Typical Cost of Debt in 2014
Credit Card debt Between 15% and 20% per year effectively
Unsecured Line of Credit debt Between 5% and 10%
Secured Line of Credit Between 3% and 5%
Government and Student Loans Between 4% and 6% (after grace period)
Mortgage debt Between 2.5% and 10%

 

The table should illustrate the fact that borrowing money from some sources is much more expensive than others, and that you can strategically use your borrowing credit to try to pay the least amount of interest possible. An example of this is borrowing money from a line of credit, to pay off your credit card bills. Instead of paying close to 20% interest, you could pay between 5% and 10%, which will equal huge savings over a few years.

Investing with debt

Once you have realized that debt can be borrowed at low interest rates if you have good credit, you may want to borrow money and invest it. Some readers might say that that is much too risky for them but the truth is; most people around the world borrow money and invest it, IN THEIR HOME! A mortgage is a prime example of an investment using borrowed money. Generally speaking, the value of a property should increase in value over time and a home is a capital expenditure that most of us need, making it a good investment. What if you borrowed money and invested it in the stock market? In the past year, the Dow Jones Industrial Average has increased in value by 14.6%**. If you borrowed $50,000 from the bank using an unsecured line of credit with an interest rate of 6% you would have made a nice profit. To be exact:

You would have had to pay $50,000 x 6% = $3,000 in interest, and your investment gain be worth $50,000 x 14.6%  = $7300. After paying off your interest to the bank, you would be left with $7,300 – $3,000 =  $4,300 in profit.

Now, I am not suggesting you max out your lines of credit and roll the dice in the stock market, but the lesson is that if you can borrow at a low cost and earn a higher rate of return in an investment, you can make your debt work for you.

 

Stay tuned for more finance!

**On March 7th 2013, the Dow Jones Industrial Average closed at a price of $14,329. On March 6th 2014, the average closed at $16,421, an increase of 14.6%.

 

 

How to Improve Your Credit Score in Canada

There are a few simple reasons why you might have a bad credit score. You haven’t paid in full or on time, or you have borrowed lots of money without having a lot of assets or income to use as security.

Once your credit is in the danger zone (less than 550 Beacon), there are a few things you can do to improve it effectively. In the mortgage industry we say “Two trades for two years” helps build you back up. Below are some examples of trade lines of credit

Types of Credit Which are Good Building Blocks for Credit

Getting a Secured Credit Card

The best way to improve your credit score is to have credit and deal with it properly, i.e. PAY YOUR LOANS! A secured credit card is a credit instrument whereby you put down a deposit and borrow against it using your credit card. This is a sure way to show future creditors that you have the intent and capacity to pay your debt.

Taking out an RRSP Loan

An RRSP loan is borrowed from the bank and used to make a deposit into your RRSP account which is later invested for tax-sheltered profits. The loan is one of the easier types of credit to qualify for, and can also help you establish a positive credit history.

Using a Car or Furniture Loan

A car or furniture loan will be a monthly payable which as mentioned before helps your credit score. Car and furniture sellers are also motivated to grant you financing to buy their products, so it is a relatively easy way to get diverse credit.

You Also Need to:

Pay all Your Loans Credit Instruments in a Timely Manner

If you can qualify for 2 of these credit facilities and pay your bills on time, you should be in a much better credit situation in as little as 1-2 years. This will ensure that you don’t have to pay those high rates forever!

Avoid Having too Many Credit Checks

Be careful with which types of credit you apply for and often consider going through a broker who can share your credit information without having other parties inquire about you separately. The less people who check into your credit, the better.

Avoid Borrowing more than 75% of your credit limit for each credit facility

Utilization of credit is a heavily weighted factor used to determine your score. If you borrow a high % of your limit, you are penalized and your score may go down.

 

It’s tough but doable!

If you follow the steps I mentioned above you should be well on your way toward being able to borrow the money you need once more.