Why can’t they? Well, if you’ve been a naughty borrower, it’ll show on your credit report, and it’ll tell lenders that you’re less credit worthy. Want to save on interest? Follow these 5 rules:

Pay your bills on time. Being a day late and a dollar short is just as bad as missing by a mile. Set up automatic payments for most of your bills. For the ones you need to check each month, make sure you pay ‘em at least three working days before the due date.

Review your monthly bills. Hey, mistakes are made all the time. If you aren’t checking over your bank statement and credit card statements you’re a dope.

Know how much you’re paying in fees and interest. People assume nothing changes. So they stop looking how much interest they are paying and any additional fees that may be tacked on. But changes happen all the time. If you hear in the news that the prime lending rate has gone up, watch your statements.

Don’t go over your credit limit. Your credit score will take an immediate hit and drive your interest rates up. Ditto dipping into your overdraft protection too often.

Lose the retail credit cards. Why would you carry a wallet-full of cards that charge exorbitant interest and can muck about with your credit bureau report willy-nilly.  You may not realize it, but the credit bureaus take the word of the credit granters when they report on your credit behavior. When I lost a department store credit card from what used to be a Canadian department store, they allowed auto charges to go through on the card even though I’d reported it lost. Since I had moved and never received the goods, I refused to pay. They dinged my credit history. (Yeah, I fought it, but all they had to do was stick to their story that I was a dead-beat and the credit bureau threw up its arms!) Since I’m not a credit user, it was no biggie for me. If I’d been up to my eyeballs in hock, I would have been paying more in interest immediately!

Often when people meet me out and about, they want to talk about the people I work with on Til Debt Do Us Part. Very often I hear, “How’d they get themselves in such a mess?”

Here’s how:

#1 No Money Management Skills. Money management is a skill too many people are missing it. Folks fly by the seat of their pants, hoping that things will turn out okay. Some days they do. Many days they don’t and people then run around fire-fighting to stay afloat. If you don’t know how much money you make, how will you know how much money you can spend? If you merrily charge whatever you’re buying on your credit card, but you don’t know how much you have to spend, how will you pay off that credit card when the bill comes in? A lack of money management skills is, perhaps, the biggest predictor of financial failure. All the credit counseling, all the bankruptcies, all the income in the world isn’t going to save your butt if you don’t take the time to figure out how to use what you’ve got to your advantage. There are rules to follow, work to put in, and self-control to be applied. It’s much easier to simply whine, “I can’t” and go happily on shooting yourself in the foot.

#2 Underemployment. Some people are just born lazy. I’ve worked with more than a few people who think that earning $14 an hour for 37.5 hours a week is all they have to do. Bringing home just over $400 a week is fine, if you’re prepared to live on $400 a week. But most people aren’t. They want to buy beer, watch movies, have cell phones and premium cable and everything else their pals have. Sometimes when I tell these people to go Make More Money, they complain that it’ll take away from their Mommy or Daddy jobs. Ya know what? That’s an excuse for not wanting to work harder since many of those same people spend hours a day doing stuff that doesn’t involve their kids. THOSE are the hours you should be spending Making More Money.

#3 Income Goes Down, Spending Doesn’t. People get laid off from work, get sick or stay home to raise their children. Their incomes go down, but their spending doesn’t. They use their credit cards, lines of credit and overdraft protection to fill the gap and then say they are surprised to find they are buried in debt.

#4 No Savings. We seem to have developed an aversion to saving. We use the excuse that we can’t get much return on our money right now, so what’s the point. Ha! Talk about JUSTIFICATION! Wow! We’ve watched the savings rate plummet over the past three decades, hitting the negatives. How can that ever be a good thing? Of course, if we were willing to live on a little less now so that we’d have a cushion set aside in case we lost our jobs, we wouldn’t be pushed into Debt Hell quite so quickly. And if, knowing we were going to take time away from work to raise kids or go back to school, we set aside some money to see us through our future plans, we wouldn’t dig ourselves a tunnel to Debt Hell.  And with three to six months’ worth of Essential Emergency Expenses in the bank, getting sick wouldn’t also make up financially ill.

#5 Getting Sick. Some people believe they will never get sick. It’s why people don’t bother to get critical illness insurance, disability insurance, or life insurance. In my mid-40’s I had to deal with the death of my best friend from cancer. She was in her 40s. And before Cookie died, she had years of dealing first with MS and then with breast cancer and finally brain cancer. It was horrible. If she hadn’t had insurance, she would have been totally screwed. As it was, every month was a challenge financially. And believe me, she didn’t need any more aggravation. Of course, you may not be the one to get sick. It may be your partner, at which point you better have some money to help pay for the things (s)he used to do. Or it may be a child or an elderly relatively that causes you to lose time off work.

Debt is like quicksand: easy to get into and terribly hard to get out of. Know what you have to do to avoid stepping into the quagmire so you can skirt the problems debt brings.

C Wrote:  Hi Gail! I love your attitude and you work! Here is my question in 2009, I was young and stupid and didn’t pay a cell phone bill due to “bill amount discrepancies”. I ignored the bill collectors until 2008 when I matured and realized I needed to clear my credit. I settled with the creditor and paid my dues. When I entered into school for fall 2010, I thought it would be a good idea to see how much my credit has grown. I was shocked to discover that the cell phone company never closed my account and it was still listed as OPEN and under collections. I phoned Rogers and then the creditors and they both blamed each other. When eventually the creditor admitted they forgot to send a note to Equifax. They said they would close it within 30 days. That was about 10 months ago now, and I am disgusted to say it is still listed on my credit report as open and leaving a long black mark even though it has been paid for over 2 years. What do I do? Is there someone who can deal with this for me whose voice actually matters? Can they compensate my 2 years of broken credit? Please help Gail!

Gail Says:  I’m sorry that you’re having such a tough time with this. Your question highlights one of the biggest flaws with the credit reporting system. Lenders and agencies can say anything they want about you and it goes on your credit history. If you dispute it, and they deny it, even if they are lying like rugs you’re the one who gets hurt. And if they don’t take the steps to fix the problems they’ve created in a timely way, there is no consequence. I’ve heard horror stories from bodies whose credit histories (and credit scores) have been trashed by incorrect information. I’ve even had a black mark placed on my credit history for charges that went through on a card that was reported lost.  And since there’s no main credit adjudicator or ombudsman, nothing ever seems to be done to fix the problem. You must keep insisting that the incorrect information is removed from your credit record. While you’re at it, tell the world just how much trouble you’re having. Maybe people will learn from your mistake and bring some pressure to bear on a system that does not function efficiently because it requires no “proof” from lenders before adding a black mark to accounts.

BTW, for those not yet bitten, the worst offenders of incorrect credit history information are the department store credit cards and other retail credit cards. Cut ‘em up. Cancel the accounts. If you must use credit, only use a card issued by a Canadian bank.

B Wrote:  So I was trying to look up information on OPD’s (Orderly Payments of Debt), unfortunately I don’t think you have any (you probably mentioned it once or twice if I recall), but with this OPD (my husband is on) we currently owe $18,000 left at 5% (started at $52,000 end of 2009) so we are going by smoothly and hopefully have it paid by next Aug (July if I can squeeze in extra payments towards it) anyways questions:

1. Being on OPD that does affect his credit rating, so would it stay at a very low number? When we got it checked online (Feb 2011) it said he has a 580…so that’s not bad being he has paid the monthly payments on time since we been on it, but assumed it stayed lower?

2. After the debt it gone (OPD) how will this affect his future credit applications? I’m worried banks might see it as bankruptcy?!?

3. Our mortgage gets renewed next July (Aug is when the last payment should be made to OPD) how will this affect our ability to get a lower interest rate on our mortgage (currently 6.39)?

4. When does this, if ever leave his credit report?

Thank you I really appreciate all the Gailism’s you have given throughout your blog, TV, radios…in person (one day I will see ya).

Gail Says:  An OPD is viewed similarly to a consumer proposal. Available only in certain provinces (Alberta, Saskatchewan, Prince Edward Island, and Nova Scotia) and Orderly Payment of Debts is a consolidation order and will most certainly be viewed by lenders as pretty close to a bankruptcy (it’s an R7 instead of an R9, but the distinction is minor in the eyes of a lender). An OPD differs from a consumer proposal in that you cannot freeze the interest or negotiate a reduction to the principal so you end up paying off all the debt over a longer period of time. In all likelihood, your mortgage interest rate will go up if your lender bothers to check your credit history. Assuming you’ve paid your mortgage on time without a problem, you might squeak by with the rate renewal being pretty typical if they don’t check. The OPD will stay on the credit history for six years from the date of completion.

C Wrote:  I love your show and watch it while I work out in the morning!  My husband and I are 50 years old, and my husband just left his job of 25 years to begin a new career elsewhere, similar pay. He can pull his pension out of his company, which amounts to about $400,000 before taxes. We have an enormous mortgage of $700,000 and although we are making the payments and living fairly comfortable, we have no money left over at the end of every month. My husband wants to invest the pension money with our financial advisor, I would like to take the pension money and put it towards our mortgage, even though we will have to pay taxes if we pull it. I realize interest rates are low, but in this economy I still think it is better than risking it in investments, even if they are fairly conservative investments. What do you think?

Gail Says:  Frankly m’dear, I think you’re nuts. You’ve lost sight of the forest for the trees. If the debt is driving you wild, get rid of it. What are you doing with a $700,000 mortgage at your age? For heaven’s sake don’t pay half of his pension to taxes for the sake of your need to get that mortgage gone. You’d have just over $200,000 to apply to the mortgage leaving you with half a mil in debt. Sell the house and get something that’s more in keeping with your income. If you’re determined to keep the house, you better find a way to make more money.

N Wrote:  I was just watching the baby version of Til Debt do us Part and there was this formula of how to figure out what your monthly payment should be for debt. You put the debt and the interest rate. Then you figure out what the monthly interest is, etc etc. I wanted to know how you figure out what the monthly interest is and what the rest of the formula is.

I know there is the debt repayment formula sheet available that tells you what the monthly payment has to be to get out of debt in 12, 24 and 36 months but this other one seemed more specific about how you figure out the interest.  Does this make any sense?

Gail Says:  Take the balance, multiply by the interest rate, and divide by 12. That’s the monthly interest.  Take the balance; divide by the number of months in which you want to be out of debt. So if your balance is $13,500 and you want to be out of debt in 24 months, it’d be $13,500 ÷ 24. That’ll give you your monthly principal repayment. Add the two together to get your monthly payment. If it’s too much, extend the number of months for the principal repayment calculation. Or make more money.

T Wrote:  We have an $800.00 overdraft on our account how do I budget for that on my budget sheet? We use this all the time and our account is always in the negative. Until our next pay which brings the balance back again. It’s a vicious cycle and I don’t know how to stop it.

Gail Says:  If you want to get out of overdraft and back into the black, it’s gonna take some belt-tightening for a few months. First, list your monthly Fixed Essential Expenses. These are the bills that you have to cover every month like your mortgage and car payment, your minimums on your debt and your childcare expenses. Total it up.

Next, list your monthly Variable Essential Expenses…The costs that you simply can’t avoid, like food and gas — we’re talking the bare minimums to get you through the month. There’s no clothing, no movies, no extras at all on this list. Total it up.

Subtract these two totals from your income. How much do you have left? (If you don’t have enough to cover the unessential expenses in your life – cell phone, satellite service and the like, you can see your problem.) Now it’s time to cut back on the nice-to-haves until you’re out of the hole. Change your services to the most basic you can get away with or ask that they be suspended for a couple of months.

Get ready to live on this very harsh, very tight budget for a month.  Just one month. Take all the rest of the money you make and stick it in an envelope, a jar, or a high interest savings account… as long as you don’t spend it.

You’re not allowed to use your credit during this process. You are, in essence, having a No Shop Month.

At the end of the month, add up how much you’ve got left after all your bills have been paid. Is it enough to cover your overdraft? If it isn’t, then you’ll have to live through this belt-tightening horror for another month (or three) until you’re back in the black.

Sure, while the land was producing tons of grain the people could have grown fat and par-tayed their loincloths off. That would have been the old way. The excess bounty would have been sacrificed to the gods in the hope that they would shine their goodness on the land in the next year. Then Joseph came along and said, “Hey, dude, you better save some of what you’ve got. There are tough times ahead.”

Happily, Pharaoh listened, storehouses were built, corn was saved, and the people had enough to sustain themselves when the seven years of famine hit.

It’s a simple concept really: whatever you grow (be it maize, corn or money), set a little aside and when things change – as they inevitably will – you’ll have the means to cope with fewer resources.

So how did the idea of savings fall so far by the wayside?

Have a look at a graphic that compares household debt and savings rates (link: http://topforeignstocks.com/2010/04/24/household-debt-gross-domestic-savings-china-vs-other-countries/ ) and see if you can pick up a pattern.

The countries with the lowest debt levels have higher savings rates. Countries like the U.S. (Canada isn’t on this graphic) and the U.K. have the highest levels of debt and the lowest savings rates.

Could it be that the mere fact that we have access to credit has changed our “need” to save. Knowing that we can pull on a line of credit or whip out a credit card to buy food, have we stopped seeing the need to set a little aside? And if that’s true, are we really planning to use credit to fund our retirements?

There you are standing in line in the big ol’ department store. You arrive at the check-out with your arms full of stuff and the cashier says, “If you apply for our card today, you’ll get a 10% discount.” You’ve been adding it up in your head. That’s about a $30 savings for doing nothing more than getting the card. Hey, how can that be wrong? You’ll just cancel the card once you’ve paid it off and you’re in the clear.

Here are a few things you should know:

1.  Not all credit cards follow the same rules. There are department store credit cards like the HBC MasterCard that do not actually cancel the account when they say they do even if you ask them to close the account or report the card lost. That leaves the account open to fraud. No discount is worth the risk! And since it’s virtually impossible to get a body on the phone to solve a problem with some card companies, you’ll be left in purgatory wondering what you can possibly do to solve the problem you created when you went for the quick discount!

2. The more cards you apply for, the worse your credit score can become. That’s because very time a lender requests a credit score, an “inquiry” is placed on your credit report. Too many inquiries — usually more than two in a year — is often associated with higher rates of default.

3. Closing credit card accounts can also negatively affect your credit report. Close a card with a positive history and the record of your good behavior will disappear. But negative credit reports stick around for six years whether or not you cancel the account, so you could be left with a credit report full of bruises.

The total amount of available credit can also affect your future ability to borrow, even if you don’t use the cards. Lenders look at the total amount of credit you have available. So if you have five cards each with a $2,000 limit, they see that as you having borrowed $10,000. Never mind that the balances on those cards are zero! Since you could use those cards (or lines of credit) at any time for any reason, they have to count that credit as already used, and that’ll limit how much more you can borrow.

If you’re finding the lure of rewards cards irresistible, be very careful. There are heaps of fools who get hooked by generous sign-up bonuses or the hunt to accumulate points. Some folks get so obsessed with their points that they completely lose sight of their growing debt. One or two cards mean you can keep track of what’s happening. Multiple cards offering multiple rewards, or department store cards with special bonuses, means you may end up with balances that start out small and accumulate quickly. The interest you end up paying more than negates the points or discounts you got in the first place. (How do you think they can afford to offer all those discounts?)

Remember, too, that the STUPID credit score system takes into account the total amount of money spent on each card, versus the available credit, regardless of whether you pay off your balance in full each month. (Have I mentioned recently just what a piece of crap the credit scoring system is?)

Have you read School Lenders Part 1, Part 2, Part 3, Part 4 and Part 5?

Collateral is the last of the 5C’s of Lending. When an asset is used as a guarantee for a loan, it is referred to as collateral.

Not all collateral can be taken at full value. If you use investments as collateral for a loan, only part of the value of the investment will be accepted since that investment’s value can go down. Makes sense right?

If you buy a car and the car is used to secure the financing, the car is collateral. That begs the question, why do people with even slightly lower credit scores have to pay so much more in interest when their loans have been collateralized? Could it be because lenders have forgotten just how collateral works? Or is it because lenders like to use lower credit scores as an excuse for charging rapacious rates even when the loan has been secured with collateral.

It makes no sense that someone with a less than stellar credit score should have to pay more on a loan that’s been collateralized, particularly when the most arbitrary things can cause your score to drop.

During the last credit dry spell, lots of people found that their credit card and line of credit limits were arbitrarily being lowered by their lenders. They hadn’t missed a payment. They weren’t abusing their credit. But down came their limits anyway. Used to higher limits, they kept charging away. What’s the diff? After all, they were keeping up with their payments every month. No problem.

Problem! Because the lender reduced their credit limits, they were using more of their credit each month, so the credit scoring system ranked their higher credit utilization as a problem and reduced their credit scores. Lenders then looked at the lower scores as justification for raising interest rates. Yup, lenders created the problem by lowering limits and then profited by increasing interest rates.

Had enough of banks’ irresponsible lending. Join School Lenders on Facebook. Send a letter off to your member of parliament asking that the rules be changed. Spread the word: Tell friends and family and anyone else who will listen. It’s time to insist that lenders re-learn how to lend responsibly.  Next week is credit education week. It’s also School Lenders Week. Are you ready to put away your credit cards and show lenders you want them to act more responsibly?

This is your opportunity to show banks you’ve got the power to stop using credit. While you’re at it, you can show retailers you are happy to use cash so they should come up with a cash payment discount to avoid credit card fees. (You should say this in every store you shop in this week: “If you give me a cash discount, I’ll save you the credit card transaction fees next time I shop here.”)

Here are some stories about School Lenders:

• Lang & O’Leary Exchange
• Wall Street Journal online
• Huffington Post

The 4^th C in the 5-C’s of Lending (y’know, that old way of lending that made lenders do some work, rather than just relying on your credit score) stands for Capital. Once upon a time your Capital – or net worth – was considered in relation to your age. A mature person with a long credit history was expected to have accumulated a greater net worth than a younger person just starting out.

It’s clear that Capital doesn’t mean squat any more. Instead of expecting borrowers to have a solid foundation of assets, lenders encourage people to borrow more and more, even as they are moving into retirement and will have less capacity to repay. Whazzup with that?

Here’s a letter I got from Meghan:

Gail, I’m desperate for help. My parents are almost ready to retire and they’ve just remortgaged their home for the third time to pay off their credit cards and line of credit. I don’t understand why the bank keeps giving them more credit when they’re eating away the value of their home and will have less income soon. My mother has worked her whole life and hasn’t got a penny saved. My father has a small pension from work, but not much else. And with the latest remortgage, they’ve wiped out their equity. I don’t know how they’re going to manage, and I’m desperately afraid it will my myself and my brother who have to step in and support them. I’ve got three kids of my own and my brother is doing okay, but neither of us have a lot of extra money. What can I say to my parents to get them to realize that they’re going to be in a huge mess if they don’t stop spending all their money.

And my response to Meghan:

M’love, I am so sorry that you are having to deal with this. I know you love your parents and I know you feel responsible for them, but you are not. You’ve got to follow the Gail Rule that says, “Don’t Put Yourself at Risk.” You and your brother aren’t responsible for your parents. They were supposed to take care of themselves. It’s one thing to struggle to help if they hit the wall through no fault of their own – sickness, tragedy, and the like. But when parents have spent irresponsibly, it is not up to their children to dig them out of the crap. Your job is to take care of yourself so you don’t end up causing your children this kind of worry. Take care of your kids until they’re old enough to take care of themselves because that’s your job too.

You can empathize with your folks, “Yes, I know it’s hard to manage on so little money,” but keep your hands out of your pockets. This is not your problem to solve. Your parents may have to move someone less expensive. They may have to work longer. They may have to learn to live on far less than they let themselves get used to. Those are their lessons, not yours.

This is a fairly common theme amongst the letters I receive from y’all. You’re desperately afraid for your elders, and you’re sick to death watching them go deeper and deeper into debt. It’s too bad. We often think that it’s our children we have to protect, but sometimes it’s the very people who we’ve counted on to protect us that are making a mess of their lives.

Of course this couldn’t happen if lenders were still looking at Capital when granting credit. If the expectation was that people’s net worth should be going up, as opposed to being eroded by rampant consumerism and irresponsible use of credit, they wouldn’t qualify for that refinance, their cards would clear, and they wouldn’t be able to dig themselves even deeper into debt. Thank you lenders!

If you’re sick to death of the irresponsible lending that’s proving to be the downfall of the next generation of retirees, it’s time to shout. Join School Lenders on Facebook. Send your letter off to your member of parliament. Spread the word. Tell friends and family. It’s time to insist that lenders learn how to lend responsibly.  Next week: The last of the 5 C’s.

Okay,  I want to do a count. If you’ve sent your letter to your MP, simply leave a “YES” here. If you also want to comment, leave a separate comment. I’ll draw one name from the “YES”s for a copy of Debt-Free Forever. If you haven’t sent your letter to your MP, what’s stopping you? Please, please take the time to do this. Ten minutes from your life is all it will take. Enough letters WILL make a difference.

The 5 C people are most familiar with is Credit History.  I am constantly surprised when I hear from people who are in a bind because they have no credit history. This is something we associate with older, widowed women who have been cared for by loving, controlling spouses. But not having a credit history isn’t the domain of slightly out-of-touch women; there are men out there who haven’t got a clue because their wives do EVERYTHING. And it isn’t the exclusive territory of our elders; there are young professionals who haven’t bothered to establish their own credit identities.

Your credit history is important because lenders follow the rule, “History repeats itself.” They want to see how you’ve behaved in the past because they believe that’s how you’ll behave in the future. That’s why when you mess up it can haunt you for a long, long time.

Once upon a time lenders also used your credit report to check up on you to see if you were being completely truthful about what you were telling them. Since your credit report has heaps of info on it, from where you live and have lived, to where you work and have worked, to if you’ve got dependents, lenders could use your credit history to verify the information you were giving them. Not so much anymore. Because the credit score is the go-to source for granting credit (damn! I hate that!), I’ve met lenders who can’t read a credit history properly! OMG!

To build a credit history you have to get your hands on some credit. But getting credit is only the first step. How you use that credit is the real test.

1. Pay all your bills, including your cell phone and utility bills, on time. Setting up pre-authorized payments is a great way to ensure payments are made on time.

2. Avoid applying for credit too often. Repeated requests for credit may be interpreted as a sign that you’re in trouble and need a way to cover your butt.

3. Charge regularly and pay off in full.  Responsible on-going use of credit will produce a good credit rating. Just having your card sit in your wallet does not.

4. Don’t over-expose yourself. Having multiple forms of credit with small balances can add up quickly and become unmanageable.

5. Don’t use credit to pay off credit. Taking cash advances on one card to make payments on another means you’re in over your head. Ditto using your Line of Credit to make your payment on your credit card. Cut back on your spending, pay off your debt and get back to the business of using credit to keep your record active and healthy, not to spend money you haven’t yet earned.

Check your credit history at least once a year. Twice a year is better. And since you can get a free credit report from each of Equifax and TransUnion just by writing in to request it, it doesn’t have to cost you a cent. Look for errors or signs of ID theft.  My friend Tash found that her credit history had been mixed up with someone else’s, which presented problems when she went to get a mortgage. Make sure that if you find an error, you get it corrected lickety-split. And you’ll have to follow-up and follow-up. Don’t assume the other guy is looking out for your best interests. It may take several calls to get an issue cleared up.

Have you joined School Lenders on Facebook yet? Have your sent your letter off to your member of parliament? Spread the word. Tell friends and family. It’s time to insist that lenders learn how to lend responsibly.  Next week: More about the 5 C’s.

“Lease…” he shouted at me, the spittle flying. He was practically sputtering. “And you call yourself a financial whiz.”

Actually, I don’t. Other people may call me that, but I just consider myself a chick who is sensible with her money. Anyhoo, I said, “So, what do you have against leasing?”

“Well, that’s like dumping a whole bunch of money into a vehicle that you’ll never own. It’s stupid. Like renting.”

Whoa now buddy, renting isn’t stupid, and neither is leasing, for the right person and the right reasons. (He might be considered stupid for buying a new car and taking the depreciation hit when he drives it off the lot, but I digress.)

Let’s look at some facts about leasing, then, shall we?

Fact #1: When you lease a vehicle, you only pay for the vehicle’s depreciation over the term of your lease. To figure this out, take the residual value (the estimated value of the vehicle at the end of the lease term) and subtract it from the total purchase price. This is the amount on which your payments are based, plus the lease (read interest) rate you’re paying and applicable taxes.

Fact #2: At the end of your lease, you have the option of either buying the vehicle for the pre-determined residual, or returning it to the dealer.

Fact #3: A lease will mean substantially lower monthly payments because you are not making any payments on said residual value. That can free up cash flow for other things, like paying down debt that’s costing you more in interest. But you will have to come up with the residual value if you want to buy the vehicle out at the end of the lease. (Yes, you can refinance the buyout, but that’s gonna cost you in interest too.)

Fact #4: You will pay more to lease if you assume the same purchase price, interest rates and total number of payments plus the residual value. What a lot of people don’t get is that while you’re leasing you pay interest on the full value of the vehicle, including the residual value. When you use financing, the amount on which interest is being calculated is reduced at a faster rate so you end up paying less.

Fact #5: Leasing can work out to be a cheaper option. If the interest rate on the lease is lower, or if the term of the financing is longer, the lease will be less expensive. Shop smart. If lease rates are better than financing rates because manufacturers are subsidizing their leases, you’ll win on the lease.

Fact #6: If you are self-employed or have a company through which you are running your vehicle(s), leasing may offer a bigger tax payoff than financing.

Fact #7: Dealers may jack up the price on a car if they know you plan to lease. Don’t go in declaring how you’re going to pay for the car. As far as the dealer is concerned, you don’t have a trade in, you don’t need financing, and you don’t plan to lease. You’re just pricing out the car.  If you’re prepared to spend a little money to get the best deal (about $40), go to carcostcanada.com for a wholesale invoice price on the car you’re looking at.

It’s your job to read and understand your lease including knowing your mileage and wear limits, overage charges, termination charges, and buyout fees. If you know you drive a lot and the km allowance will be used up in no time flat, then reconcile yourself to buying out the vehicle and start saving the money you’ll need.

Everyone needs to have the ability to borrow money. That’s true whether you’ve just found yourself in the new role of single parent without an emergency fund or you’re a young adult starting out.

1. Get a Secured Credit Card. The fastest, cheapest and easiest way to establish a credit history is with a secured credit card. Since there’s no risk to the lender because you’ve put up the cash to cover your balance, secured cards are great for new borrowers or people trying to re-establish credit after a bankruptcy.

Lenders usually want twice the credit card limit. So if you want a $500 credit limit, you’ll have to ante up $1,000. Once you’ve established your ability to manage the card – anywhere from six months to a year – you can ask for the security requirement to be dropped and your deposit returned.

2. Get a gas or department store card. Gas or department store credit cards are often easier to get and can be good ways to establish credit. You must pay your bills in full and on time because the interest rates on these cards are often astronomical. But as long as you don’t miss a payment – which you never will, right? – it makes no difference what the interest rate is. Use these cards wisely and they can be a great toe-hold.

3. Borrow for an RRSP. Borrowing money to contribute to an RRSP is a great way to establish a credit history. While the RRSP are not officially used as collateral for the loan, lenders know where to find their money so approvals come more easily and the interest rate won’t be horrendous. Make sure you only borrow as much as you can afford to repay in six months. How much you borrow doesn’t mean much; repaying the loan quickly without a misstep does. Don’t let anyone talk you into more. Once the six months are up, use the amount you were using to repay the loan as your month retirement savings contribution. Now you’re building up your assets, which will be good for your credit history too.

4. Get a co-signer. While I’m not a big proponent of signing on for other people’s debt, if you can find someone who loves you enough to put their credit history at risk for you, do it. Make sure the loan history is being reported in your name and not the co-signer’s.

5. Put up collateral. If you have someone a lender can sell to get back his money, you’re more likely to get credit. Collateral comes in all sorts of forms: from the car you’re buying to those GICs you’ve got stashed away, if you have something a lender values, you’re in the money.

Of course, getting credit is only the first step to building a credit history. How you use that credit will be the real test.

1. Pay all your bills on time. Yes, including your cell phone bill, since some cell providers report to the credit bureau. Setting up pre-authorized payments is a great way to ensure payments are made on time.

2. Avoid applying for credit too often. Since repeated requests for credit may be interpreted as a sign that you’re in trouble and need a way to cover your butt, this will adversely affect your credit score.

3. Charge regularly and pay off in full.  Responsible on-going use of credit will produce a good credit rating. Just having your card sit in your wallet does nothing to add positively to your record.

4. Don’t over-expose yourself. Having multiple forms of credit with small balances can add up quickly and become unmanageable.

5. Don’t use credit to pay off credit. Taking cash advances on one card to make payments on another means you’re in over your head. Cut back on your spending, pay off your debt and get back to the business of using credit to keep your record active and healthy, not to spend money you haven’t yet earned.

When merchants accept payment from you in the form of a credit card, there’s a cost associated with that. Merchants pay somewhere between 2-4% of the sale price in any transaction for which they accept a credit card.

Let’s say you go into a store and buy an item for $50 on your credit card. You’ll owe your credit card company $50. But the merchant won’t get $50. She may gets somewhere between $46 and $48. The rest is shared (not necessarily evenly) between the merchant’s payment processor (someone like Visa or MasterCard) and the shopper’s credit card company (most often your bank).  The credit card companies make a killing on the fee they charge retailers – upwards of $4.5 billion in 2008 – and retailers can’t do a thing about it.

The kind of card you use affects how much the retailer gets dinged. Premium cards carry higher fees from the credit card company. So if Bank of Nova Scotia is offering a premium card with big cash-back options, know that every retailer you use that card with is eating a bigger service fee for accepting payment on that card. That’s how The Bank can afford to offer you so much “cash back”.

According to a Bank of Canada survey, on an average $36.50 transaction, the cost to the retail for taking a credit card was 82¢ or 2.25%. Bigger stores pay less since the cost of an electronic transaction falls as the volume increases, which means smaller retailers pay a disproportionately higher cost for accepting your card.

So why don’t retailers offer a discount to people using cash? It’s a good question. They can. And if they want to reduce their costs, they should. After all, if they’re paying 3% in fees, they could offer the customer 2% off and still be up on the transaction. In the U.S. there are states that require retailers to display both the cash and credit price of an item. And some retailers offer a significant discount – up to 5% — to customers who use cash rather than plastic.

Since the price is the same for those paying cash as for those paying with credit, it has been argued that those people who shop with cash are actually supplementing those who use credit cards. According to one report by the Consumer Payments Research Center in the U.S. “On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year.”

Wow!

Retailer’s only recourse to deal with the ever-increasing costs of processing card payments is to increase their prices to everyone. The result: those people who can’t afford premium cards and so don’t benefit from the rewards actually end up paying more. One report says the lowest income households (those making less than $20,000 a year) pay $23 a year, while the highest income households (those making $150,000 or more annually) receive a subsidy of $756 every year.

So, how do you feel about those reward cards now? Does it prickle your conscience to know that you might be contributing to the disparity between rich and poor? And as someone who uses a reward card, would you be willing to put it away to send the message that you disagree with equal pricing for all types of transactions?

What if there were one day every month when everyone put away credit and paid with debit (which is actually cheaper for merchants than when you pay with cash), would you participate? Want to start a trend?

Gail Says:  You do not say whether the money is in a retirement savings plan or outside one. If it is not in your RRSP, then the assets can most certainly be “attached” if you claim bankruptcy, so you would be far better off paying off the debt and creating some breathing room in your cash flow. Then you could rebuild your assets. Put away the damn cards!

Holly Wrote:  Could making bi-weekly payments on a credit card help get the debt down sooner? I find it easier to budget big payments if I can split it by two pay checks.

Gail Says:  The sooner you make your payments, the less interest you pay. So go ahead and make a payment bi-weekly.

T Wrote:  I love the show. I have started to implement a good budget and we have paid off all of my credit card debt. My husband and I are now left with student loans and his credit card debt. We owe about the same amount on his credit cards and my undergraduate loan approx. 10K. He has had his interest rates dropped to 0%-2% on the debt and my student loans have 5%-6% interest rate on them. Just based on interest rates I would like we should pay off the student loans off first (they have about 4 years left on them) but since they are student loans I wasn’t sure. Should we send all of our extra money to the student loans or the credit card with the highest interest rate first?

Gail Says:  Since the lower interest rate is an opportunity to get rid of that consumer debt even more quickly, that’s where I’d put my focus. Then snowball the money to the student loans.

E Wrote:  I have been discharged from my second bankruptcy for 4 years now.  I have a secured credit card which I have had for 2 years.  I pay my bills on time, have started an RSP and a tax free saving account over the last 6 months.  I currently have a credit score of 627.  Can you please tell me what else I need to do to build my credit back.  This seems to be a very slow process and I’d like to know what I’m doing wrong.  I’m a single parent with one son getting ready for college and am trying to help with this as well.

Gail Says:  What you did wrong was go bankrupt TWICE. What you’re doing now is right, but you need to be patient, consistently demonstrate good financial management and recognize that it’ll take some time for lenders to trust you again.

B Wrote:  I am an 18 year old student who is planning to go to university in the upcoming fall. I have approximately 2 thousand dollars saved of my own and my parents don’t have any money put away for me. I have one parent who is working and another parent who is retired, at fifty thousand dollars a year with four children and lots of expenses I’m not very confident about receiving very much financial assistance from my family. I am applying for bursaries, and scholarships as well as government assistance but my biggest concern is that I’m going to barely scrape by for the next four years and then come out of school with 60 thousand dollars worth of debt. How can I try to manage my money better so all my problems can be dealt with at least to some degree?

Gail Says:  You’re very smart to be thinking about the debt you may have when you graduate, and ways to minimize it. You don’t say if you plan to live at home (in which case you’d just have tuition and school supplies) or if you plan to live away from home (which would be more expensive, but a different experience). In the first case, you can bank on spending about $9,000 a year, depending on your degree. In the second case, look at spending about twice as much. I have a bunch of worksheets on my site (look under my blogs in the “students” category).

It’ll be important that you earn as much as you can as you go to minimize your overall debt at the end. Working the four months between school years will make a big difference. But you must apply early for jobs (start in Jan for a job in May). You may have to piece together work, doing part-time at several different jobs to make enough. Aim for about $500 a week. If you can also work part-time while in school, great!  But don’t let work detract for school.

If you live away from home, how you live (sharing space versus living on your own, cooking for yourself rather than eating out a lot) will also have a big impact on how much you have to spend. Remember that school is about learning and growing, not just academically, but also in life skills.

J Wrote:  We love your show & follow your tips & use the jars!  3 years ago, we put $30 000 of consumer debt on our mortgage (due to my husbands large purchases he put on a line of credit). Currently, our mortgage is our only debt we have (no car payments either).

My husband now wants to put an extra $10 000 a year (on top of our weekly & top up payments) on the mortgage to pay it off sooner and remove the consumer debt portion. We currently do not max our RRSPs but do save 10-15% and we have an emergency fund. What should we do with the extra $10 000?

We are both 34 year old, I’m currently on Mat. leave but when not on leave, our gross salary is $115,000. Our current mortgage forecast is that we’ll have it paid off in 19 years. Combined we only have $60 000 in RRSP, plus my husbands union pension.

Gail Says:  Since the $30K you consolidated to the mortgage is consumer debt, your husband is correct in wanting to get that paid off sooner rather than later. You say you do not max your RRSPs but save between 10-15% of your income and have an emergency fund. So you’re saving enough. I would follow your husband’s lead to pay down the consumer portion of the mortgage debt. Once that’s gone (a little less than 3 years), top up your RRSP and have some fun!

A Wrote:  My husband refuses to believe that we can live without a credit card.  He is just coming out of a bankruptcy and will be applying for a secured card “for emergencies.” In spite of both of us learning the hard way how an “emergency” can pop up when it seems we have the means, he feels that getting this card is something that we need to do.

I would rather not do this. We are on week three of using our money jars and I can see a light at the end of the tunnel. He, however, says that if he doesn’t get this card than we can’t do things like rent a car when we (eventually) go on a vacation.

Is he right? Is there any way to secure rentals and such without the use of a credit card?

Gail Says:  Your husband is correct that there are a number of things for which you need a credit card: car rentals, hotel bookings, and the like. And a credit card used wisely can help to rebuild your credit rating. If you are serious about using the card only for these types of things, then get your husband to agree not to use it for “credit.” Before you buy anything, you must prepay the card. That way you are only ever using your own money. That’ll keep you out of trouble.

Gail says:  M’love it’s going to take time and the consistent positive use of credit. While you may love living on cash, to get a better credit history you must use and repay your credit card consistently. So instead of shopping with cash at the grocery store, set the amount you would have taken in cash in stone. Then put it on a credit card. When you get home, pay it off online. If you have two cards, use one for groceries and one for gas. In a few months, your new record will push your old mistakes further into history.

J wrote: We have a $23,000 credit line debt at a variable 4.75% beside our $57,000 mortgage at 3.44% fixed rate. We have $6000 invested in non-RSSP that we usually turn into RRSP at the end of February. We have already $5200 in a RRSP for this year. My husband thinks that we should repay the credit line instead of putting the $6000 in a RRSP. I am not sure. This RRSP would give us an extra $2742 in Tax refund which would bring the amount to $7846. We will put the tax refund toward the Credit Line. What is the smarter move?

Gail Says:  You already know what I’m gonna say: save and use the tax refund to pay down the line. That way you’re covering all your bases.

Jodi wrote: I wanted to write to let you know that I love your shows and that your advice made a big difference in my life. Watching you on TV really cheered me up and made me believe in myself.

I will try and make a long story short. A few years ago, in Sept 2007 I went to a bankruptcy trustee. I had been struggling to make ends meet and make minimum payments on credit card balances that just kept getting bigger and bigger every year. I thought I would be in debt forever and was very unhappy because no matter how hard I tried the debt just loomed larger. Even though bankruptcy was a painful decision to make and live with, I never looked back because ultimately it was a fresh start. I could finally sleep at night and not ponder my debt every waking minute of the day (and night).

About a year later, after my bankruptcy was discharged in December 2008, I started a wonderful job that changed my life financially forever. All employees were granted stock options in the company which became enormously successful. I now have in excess of 100k in stocks, cash and mutual funds, paid off my car loan and have a credit card I pay in full every month.  I also still hold stock options valued at 100k + which I have not cashed in yet.

My problem is that even with a significant down payment and assets, not one bank will grant me a mortgage, high interest or otherwise. One trust company offered a fixed rate mortgage at 4.99%, with 25% down (I wanted to put 20%). I declined. Obviously.

I also learned that even though I have the document from the court stating my discharge was in December 2008, Equifax did not post it until March 2010. I presented this document to my mortgage broker, and was smugly informed that it was not helpful to my cause. I have been snubbed, insulted and patronized by everyone from banks to my own real estate agent that “someone in my position” should be grateful for a lousy 4.99% mortgage.

I am not sure what I can do or if you can offer any advice to me. I am not arrogant to think that I will get off scott-free, but I have certainly busted my butt to get where I am and been prudent with the money I was gifted by my employer. I really turned my life around in the last 4 years and just want to buy a home…how can I make this happen?

*I also am writing this to let anyone else who is considering or in the bankruptcy process know that it is not that easy to rebuild your credit afterwards. Even with the money I have in the bank, TD laughed in my face when I asked for a SECURED card (Capital One is pretty good)….don’t forget, the bank is NOT your friend!

Gail Says:  Jodi, I am happy and sad to hear your story. I’m happy because you’ve done such a great job of turning things around. You should be very proud of yourself. I’m sad because things are going to be a bit difficult for you for a while. That’s the reality of having declared bankruptcy. In today’s much tighter credit market, you’re catching the brunt of the blowback from all those bad lending decisions.

Equifax should post the date of your discharge so make sure that the relevant date shows up. Write to them and send them a copy of your discharge papers, and get the record clear. As for a 5% fixed rate mortgage, I wouldn’t turn my nose up at it honey. A quick check at RateSupermarket.com shows [at the time I responded to this letter] the 5-year rate ranging from late 3’s to early 5’s so your offer isn’t really terrible. Perhaps not the best, but you have to expect some consequence for the bankruptcy. I recommend you go and see a mortgage broker who has some experience working with bankrupts. If you’re in the Toronto area, try www.mortgages4women.ca.

As for TD’s refusal to give you a secured credit card, that’s ridiculous, unless they were one of the companies who had to bite it when you declared bankruptcy. Whomever you were dealing with will likely never extend credit to you again. That’s the usual policy.

Stay positive. You’ve come a long way and you’re going to be fine. You should be very proud of what you’ve accomplished. You’re strong and able, and you’re going to have a great life. The stumble was just that. Walk tall now.

L wrote: We declared bankruptcy in Sept 2009.  We were told by our trustee in June 2010 (9 month mark) that we were through.  I asked her twice, are we done?  I don’t have to send any more financial statements in?  She stated yes, however, after the fact we were told we were not finished and we were not out of bankruptcy and that we would not be until June 2011.  (21 month mark). They said: the rules changed in the fall of 2009 and that we fell under the new rules.  Can you please elaborate concerning this?  It feels to me like we have been misled. This is a reputable company, but I still feel uneasy.

Gail Says:  The bankruptcy rules did change, but your trustee should have known that and have told you about it before telling you you’d be discharged at the 9 month mark. There is a calculation that determines whether you’ll be discharged at 9 or 21 months, and your trustee should have done this calculation before telling you in June 2010 that you were in the clear. However, that’s moot, since you weren’t informed and you haven’t been discharged. I’m afraid you’re just going to have to proceed through the bankruptcy under the new rules. But I’d kick up a big stink at the trustee office and see what they’re prepared to do to help fix this problem. Go for a refund of at least 50% of your trustee fees as compensation for the misinformation.

Most people don’t know what their credit score is.  And according to a poll conducted by MRP Market Research Professionals in November 2010, 75% of insurance consumers are unaware that credit score is used to determine how much premium a person pays for home insurance.

How does the use of credit scoring affect premiums?  Well, the Insurance Broker’s Association of Ontario (IBAO) recently sampled 54 property renewal policies from one insurance company known to use credit scoring aggressively.  Of those 54 policies, the average premium increase was 73%, the largest premium increase was 155% or $762 annually, the smallest increase was 11% (interesting that they noted no premium decreases) and 7 policies included claims related increases and were excluded from the sampling.

The use of credit scoring as a factor for determining premium adversely affects those who use lines of credit such as single income families, seniors, newcomers to Canada, the unemployed and small business owners.

In 2005, the Ontario government banned the use of credit scoring in auto insurance and further strengthened that position in 2010 by banning the practice entirely at every stage of the auto insurance transaction.

Additionally, the provinces of New Brunswick & Newfoundland have announced that they intend to ban the use of credit scoring from personal property insurance.

Considering all of this, one would think that if the Ontario government feels it is not right to use credit scoring in auto insurance then it should not be allowed in personal property insurance.  Thinking about the number of people who take advantage of package policies and extra discounts for combining home and auto insurance together, the question becomes: if the use of credit scoring is allowed on personal property insurance, is it even possible to prevent that information from being available or used on auto insurance when both lines are with the same insurance company?  Personally, I don’t think it is possible.  To have the use of credit scoring prohibited in auto insurance makes it necessary to be prohibited in personal property insurance.

This past November 2010, Liberal Member of Provincial Parliament, Mike Colle, introduced his private member’s Bill 130: The Homeowners Insurance Credit Scoring Ban Act, 2010.  This bill bans the use of credit scoring on personal property insurance, something a growing number of insurance companies are already doing.

In an effort to support Bill 130, the Insurance Brokers Association of Ontario launched a new website: www.soaringinsurancerates.ca on May 16, 2011.  Through this website, insurance brokers across Ontario are encouraging members of the public to contact their local MPP’s by using an online form to get the message to all MPP’s that the use of credit score on personal property insurance needs to be banned just as it already is on auto insurance.

The use of credit scoring in insurance has nothing to do with the insured risk.  This is something the government has already recognized in auto insurance because a person’s credit score is not related to accident records or tickets.  The government recognized that the use of credit score in auto insurance was unfair and not in the public’s interest.  It’s now time for the government to support the precedent that was set with auto insurance by extending the ban for the use of credit scoring to personal property insurance.

For more information on Bill 130, the use of credit score in personal property insurance and to contact your MPP regarding this issue, visit www.soaringinsurancerates.ca.

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Kat, you won yesterday and I’ve sent you email to MrsJanuary.

Today is Day Two of the giveaway of Casssie Howard’s (MrsJanuary.com) Money In Your Pocket, which focuses on saving money on your grocery bills. To enter, answer the question of the day in the comments. Today’s question: What really ticks you off when it comes to the financial companies you deal with?