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Are You Getting Credit for Having Good Credit?

This is a guest post from Borrowell.

“Whatever you do, don’t go into debt!” That, in a nutshell, is what we hear again and again from governments and financial planning experts.

It may be good advice, but we Canadians don’t seem to be listening, with household debt levels continuing to rise. According to the credit bureau Equifax, average consumer debt rose by 2.9% in the last 12 months and demand for credit rose by a massive 8.5%. The Bank of Canada recently reported that household debt had reached 163% of disposable income, which is both a record for Canada and higher than the U.S. So much for us being more financially cautious than our southern neighbours!

Clearly, there’s a growing disconnect between what we hear and what we do. So it’s time to change the conversation:

Let’s stop talking about the problem. Let’s start talking about a solution. How can we manage the debt we have? How can we create a plan to get out of debt?

Here are four tips for those of us carrying more debt than we want:

1. Give Your Debt a Check-Up

To start, make a list of all your outstanding debt, including mortgages, car loans, credit card balances and installment loans. Write down the amount and interest rate for each one. The interest rate should be on your statement. If you can’t find it, you can call your bank or lender and ask.

There are many kinds of debt out there. Some kinds, like mortgage debt, can be relatively healthy in moderation: mortgage rates are at record lows, plus a mortgage means a home and a place to live. Other kinds of debt are less healthy. Credit card debt, for example, typically carries higher interest rates, ranging between 19.9% and 29.9%.

Why are credit cards rates higher? When banks advertise a credit card rate, they have to offer it to everyone. They can approve or deny customers, but they can’t offer different rates to different people (known as “risk-based pricing”). So even if you’re a responsible consumer, you end up paying the same rate as someone who isn’t. You get no credit for being a good credit. As a result, we have a market dominated by high-interest rate credit cards.

2. Make Your Debt Smarter

With your list in front of you, look at the loans with the highest interest rates. These are the most expensive and the best ones to reduce first. Credit cards can be a great place to start as many people who carry credit card balances could easily qualify for lower rates—see the “risk-based pricing” explanation above.

One easy way to test this is to see whether you qualify for a lower cost loan. Borrowell, for example, allows you to check your rate from your computer, instantly and for free—no branch visit or phone conversation required. Just go to the website and click “check my rate”. Fill out a short form and you’ll know instantly whether you qualify for a low rate.

The other advantage of a Borrowell (or similar) loan is that it has a fixed term, meaning that in three years or five years, it’ll be fully paid off. In contrast, if you pay only the minimum monthly payment on a credit card, it can take decades to pay off a balance. In the meantime, you could pay thousands of dollars in extra interest.

3. Read the Fine Print on Low Rate Credit Cards

Some institutions offer low rate credit cards, but the savings are often an illusion. First, the cards often have an annual fee between $29 and $79 or higher  If you carry a $1,000 balance, that effectively adds between 2.9% and 7.9% to your rate.

Second, the cards typically have no reward or cash back feature. As a rule of thumb, those credit card rewards are usually valued at 1% of the purchases you make with your card, so you lose this benefit when you switch to a low rate card. Third, these cards are not usually widely advertised – and you won’t find them on most bank websites. Often they have low limits, and they are difficult to qualify for.

If you’re a responsible borrower, you’re better off with a loan product that can offer you a personalized interest rate and a rewards or cash back credit card that you pay off every month. That way you get the best of both worlds: a low-interest rate loan so that you’re not subsidizing everyone else, and a rewards or cash back credit card that pays you, not the other way around.

4. Come up with a Budget

No surprise: the key to getting out of debt is a good budget. With some clear answers about what a fixed term, personalized loan would cost, see what you can work into your budget—and then get going and make the changes.

Andrew Graham is CEO of Borrowell, a lending platform offering affordable, fixed-interest loans that give Canadians a smarter alternative to credit card and other high-cost debt. He and the Borrowell team are passionate about bringing innovative financial services to Canadians. Previously, he led the insurance business at PC Financial and graduated from the University of Edinburgh and Harvard Business School. Andrew’s into coffee and biking – though not at the same time.

Image purchased from Shutterstock by Borrowell.