Managing credit now brings future financial rewards

But credit is a two-edged sword. Abuse your privileges and you may not be able to take advantage of credit when you need it - for a car or business loan, home renovations, or a mortgage.

Below are some tips on using credit to manage your finances and help you reach your goals.

Establish healthy credit habits
Be a smart borrower
Debt management strategies
Do you know what your credit report says about you?

Establish Healthy Credit Habits

Here are some "do's and don'ts" that will establish you as the kind of person that lenders are eager to do business with:

Do pay bills - hydro, phone, cable - on time. If you're the forgetful type, set up direct bill payments from your bank account. It's painless, and will help your credit rating.

Do get a credit card. The utmost in convenience, credit cards have become necessary for everything from booking a hotel to renting a movie.

Do pay your credit card bills on time. This will help you build a solid credit history and avoid high interest charges.

Tip: If you have a tendency to run up credit card charges that exceed your cash flow, use your debit card when you would normally use your credit card. The money comes directly out of your account, limiting your spending to what you can afford in cash.

Do limit yourself to one or two cards. It makes record-keeping simpler, and it removes the temptation to abuse credit. Also, beware of retail credit cards, as their interest rates are typically higher than those charged by the major credit card companies.

Don't draw cash advances on your cards. A personal line of credit is a much more cost-effective way to give yourself access to cash when you need it.

Do establish your own credit identity. In many families, credit is held in the name of one spouse. If the relationship ends, one spouse may be left without a credit identity, making it much more difficult to borrow when needed.

Be a Smart Borrower

Debt itself is neither good nor bad - it's how you use it that counts. "Good debt" is a loan that represents an investment in your future. Here are some examples of debt that smart borrowers might consider using:

• Student loans that help you get an education - easily one of the best investments you can make.
  
  
• Loans that are used to purchase an asset that may increase in value, such as real estate.
  
  
• RSP catch-up loans. Tip: Using the resulting tax refund to pay back the loan makes for a powerful one-two combination.
  
  
• Loans that are used to earn investment or business income, which can make the interest tax-deductible.
  
  

Now consider debt that compounds and provides no future benefit; in other words, "bad debt." Here are some examples:

• Taking cash advances on your credit card. Interest is charged from the day of the advance.
  
  
• Borrowing money to purchase a luxury item that has no future financial value to you or your family.

Debt-Management Strategies

The key to making debt work for you rather than against you is to be proactive. Here are some effective strategies to explore:

Pay down expensive debt first. In order to use good debt wisely, you should first reduce or eliminate bad debt. Let's say you have some money set aside in a low-interest savings vehicle but you are carrying a balance on a credit card that charges 18%. It makes sense to use some of those savings to pay down the debt.

Consolidate debt to save money. If you find yourself struggling to pay down expensive debt, consider taking a line of credit to consolidate your debts at a lower overall rate. You'll save a bundle on the interest charges, and it'll be easier to keep track and take control of your finances.

Use savings and cash for lifestyle needs. If you need a vacation, it's wise to use any savings you have accumulated to pay for it rather than going into debt. Better yet, plan ahead by creating a separate "vacation" account and adding a little to it each month.

Do You Know What Your Credit Report Says About You?

Canada has two credit reporting agencies - also known as credit bureaus - that keep your credit history files:
Equifax Canada Inc. and Trans Union of Canada, Inc. Every time you apply for a loan or pay a bill, that information is recorded in your file. Some of the information can remain in your file for up to six years - or up to 14 years if two or more bankruptcies are involved.

There are a number of reasons you might want to find out what's in your file:

• You've been denied credit and want to know why.
  
  
• You're about to apply for credit and want to know where your credit rating stands before meeting with the financial institution.
  
  
• You want to ensure that the information is up-to-date and accurate.
  
  
• You want to see where you can improve your financial habits.
  
  
• You want to thwart "identity thieves," people who steal your personal information and rack up large bills, wreaking havoc on your credit rating.

Did you know... Only 13% of Canadians have ever seen a copy of their credit report or had its contents read to them over the phone. You have the right to see what's in your personal credit report, at no cost to you.

What's in a credit report? A credit report includes personal information such as name, SIN, and birth date. It also includes a list of organizations that have requested a copy of your credit file in the past three years.

This information about inquiries is important because it can look bad to have too many. This is something to think about before shopping around for a mortgage with 10 different banks - a long list of inquiries could be mistaken for a long list of mortgage rejections. Bankruptcies and dealings with collection agencies are also included.

You will probably be most interested in the trade information - details of your credit transactions. Evaluations are based on industry standard ratings that range from 0 (or R0) to 9. Here's what the ratings mean:

0 - Too new a file to rate; approved but not used.

1 - Pays (or paid) within 30 days of billing; pays account as agreed.

2 - Pays (or paid) in more than 30 days, but not more than 60 days, or not more than one payment past due.

3 - Pays (or paid) in more than 60 days, but not more than 90 days, or two payments past due.

4 - Pays (or paid) in more than 90 days, but not more than 120 days, or three or more payments past due.

5 - Account is at least 120 days overdue but is not yet rated "9."

6 - Not used.

7 - Making regular payments under a consolidation order or similar arrangement through a third party.

8 - Repossession (indicates if a voluntary return of merchandise by consumer).

9 - Bad debt, placed for collections, skip.

Staying within the 1-2 range is best. Most organizations do not look kindly on potential customers who repeatedly score a 3 or higher.

I've looked at my report, now what? If you spot an error in your credit report, contact the credit bureau and explain what the problem is. They can correct mistakes or update your files if there is proof a mistake has been made. (One more reason to keep accurate financial records yourself!)

If you've looked at your report and it's correct, but you don't like what you see, it's time to get your financial patterns back on track. Read the section "Establish healthy credit habits" (above) for some helpful tips.

If you are having difficulty managing credit, you may be able to get free or low-cost financial counseling through your local or provincial consumer credit counseling services. They can help you get turned around.

How do I obtain my credit report? Equifax Canada requires photocopies of two pieces of ID. Sign the photocopies and include a note indicating current address, former address, date of birth, and daytime phone number. Call 1-800-465-7166 for more information, or visit their web site.

TransUnion Canada also wants photocopies of two pieces of ID (both sides). At least one piece must include a signature. If you have lived at your current address for less than five years, provide your previous address as well. Call 1-800-663-9980 (Quebec, 1-877-713-3393) for more information, or visit their web site.

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