The Credit Counselling Society was established in 1996 as a registered charity to help people deal with their debts. It's a non-profit service which has, over the years, helped thousands of Canadians become debt free and stay debt free. This is why it's named its website NoMoreDebts.org.
One of its key successes is that it's made up of passionate people who don't just focus on helping people pay off their debts, but also help them learn how to budget, manage money and use credit responsibly. This is why the Credit Counselling Society has also established a website featuring great tips and free webinars at MyMoneyCoach.ca.
We spoke to Scott Hannah from the Credit Counselling Society to get some tips on managing debt.
What's your number one tip for using credit responsibly?
Think of credit as cash.
It's important to remember that credit is someone else's money that you get to use for a while, but you have to give back at some point. Don't think of your credit cards, lines of credit, overdrafts, etc. as your money. When you are looking at making a purchase, make sure you have a plan for how to get out of debt and pay off what you borrowed.
Why do you think we get into debt so easily these days?
Based on thousands of interviews with our clients, we have found the top three reasons our clients experience financial difficulty are: Overusing credit (including using credit to pay for regular living expenses), unemployment or underemployment, and not knowing how to make a budget or manage their finances. Other reasons include injury or illness, family issues, high education costs, student debt and high housing costs.
Debt has become very normal and many people take advantage of low interest rates on loans and lines of credit to pay off high interest credit cards. Combined with the low interest rates paid on savings, many people have lost sight of how detrimental never-ending debt payments really are to their future choices and opportunities. Paying for the past makes it very difficult to plan for the future.
What do you consider unnecessary debt?
This is similar to the question about "good debt" versus "bad debt," which has been around for a long time. Our answer would have to be: It depends.
Typically, good debt is money that you borrow to invest in your future. This can mean a mortgage or a student loan. Bad debt is typically thought of as money that we borrow where we have little to show for it later on. Credit cards, overdrafts, high interest retail financing plans, and car loans to a certain extent usually fall into the bad debt category.
However, even good debt can be bad if it's used in the wrong way. A line of credit is a great example of this. When used to pay for renovations that increase the value of a home, a credit line could be considered good debt. But when used as an extension of someone's paycheck to pay off higher interest debts and make ends meet, it's bad debt. Just like any tool, when used correctly it won't hurt you.
What do you say to someone who feels overwhelmed by managing their finances, like maybe they feel like they're "not good with numbers"?
Being overwhelmed means you feel out of control. Getting back in control starts with understanding what's actually happening with your money and then deciding what changes to make.
If tracking what you spend your money on seems a little daunting, start by looking over a couple of months of credit card and bank statements. This will give you a good idea of where your money went. Once you've identified what your spending habits are, you'll be able to make better decisions with your money.
This is where a tool like Mint.com comes in. It helps track spending for you so you don't have to dig through statements to figure out where your money is going on your own.
What is the debt pay-off method you recommend?
There's really no one way that works for everyone, but there are three crucial steps that so many people overlook when they create their debt reduction plan.
Number one: Make savings are a part of your plan. If you don't set money aside to pay for the expenses that you used to use credit for, as soon as you pay down your debt, you'll have to rely on using credit again when you're faced with those expenses.
Number two: You need to create a realistic budget to manage all of your expenses so that you know how much money you can afford to use to repay debt. Then as your circumstances change, adjust your budget accordingly. It needs to be a living budget, not just a pretty spreadsheet or page posted on the fridge.
And number three: Get started. Set realistic goals and determine how you'll achieve them. Start small and let your success motivate you. If you find that your debts are too much to handle, ask for help. You are much better off getting help to manage your debt than hoping it will go away on its own. It won't.
How do you think tools like Mint help people budget better?
Mint is a great way to actually see where your money is going. It's a way to not only track what you've spent, but also identifies your spending habits so you can make changes and better choices. We recommend Mint to our clients through our education programs and seminars.
Ultimately, it's a tool to help you reach your financial goals, whether that's paying off debt, saving more, managing day-to-day spending better, or a combination of all three.
When in life should we start our financial planning?
It's never too early (or too late!) to get started. As kids, it's important to learn how to save and set small goals with money. As teens, it's important to learn how to earn money, budget and manage it effectively, save towards bigger goals, and even start investing. By the time someone is in their 20's or 30's, if they've had the chance to develop good money management habits growing up, they're much less likely to get into trouble with credit. The earlier they start, the better their foundation for the future.