Managing Credit & Debt

Students in Lister Dining Hall

Sometimes managing credit and debt may seem like an impossible challenge. However, there are a number of approaches you can take to make it easier. Simply knowing some of the most important things to consider when getting a credit card can set you on the right track for success. Once you start incurring debt, determining the repayment strategy that is best suited to your circumstances will ensure that you are headed towards a financially rewarding future.

Before making any financial decision, please consult a financial advisor to ensure it is recommended for your individual circumstance.

Debt Repayment Strategies

There are two main approaches you can take to debt repayment, and it’s important to determine which is more suitable to you. If you are someone who enjoys working hard for the big reward, you may prefer the avalanche strategy, whereas if you are someone who likes to see small wins to motivate yourself, the snowball strategy is a great option!

Avalanche Strategy

Just as an avalanche moves down a mountain from the top to the bottom, this strategy encourages you to tackle the highest-interest debt first. First you need to determine the amount of funds you can allot each month to debt repayment. Next, begin by paying each debt's minimum monthly payment. The remaining funds will then be put towards paying off the highest-interest debt first.

Once it is paid off in total, the extra money left after making the minimum monthly payment would be put towards the second-highest interest debt. The main advantage of this approach is that it reduces the amount of interest you pay, by eliminating the highest-interest debt as early as possible. This method also limits the total amount of time it takes to get out of debt, because interest will not add up as quickly.

Snowball Strategy

An alternative approach is the snowball strategy, where you will begin by determining the amount of funds you can allot each month to pay off your debt. Following this, list each of your debts from smallest to largest. Pay only the minimum monthly payments on all of the debts, and then apply extra money to paying off the smallest debt first. Once the smallest debt is paid off in full, start putting the extra money from that debt payment towards the second-smallest debt.

You are snowballing your debt payments together. Paying off debts can seem more manageable with this method as you will more easily and quickly reduce some of the smaller debts off the list. The main advantage of this approach is that you will more quickly see your first debt paid off because you are starting with the smallest debt, but you will end up paying more in interest because you are not beginning with the highest-interest debt.

Try out the strategy you think suits you best, and if you find you are not successful, consider switching to the other approach to see if you have more luck!

Credit Cards 101

Before you apply for a credit card, it is important to understand the pros and cons so you can decide what is right for you. While debit cards appear to be the better option as you never incur debt, having good credit will allow you to more easily access loans in the future.

Even if you already own a credit card, here are some tips for credit card applications, building good credit, and using your credit card mindfully:

  1. Shop around: Did you know that all of your credit card applications stay on your credit report? Because of this, you want to be smart about selecting a card that is a good fit for you. The Financial Consumer Agency of Canada has a credit card selector tool to help with this process. Limit the number of cards you apply for at once, as this can affect your credit score. It is recommended to leave six months between applications. If you need more assistance picking the best card for you, try using this credit card selector.
  2. Evaluate rewards: Rewards programs can be enticing, but it is important to ask yourself a few questions before committing to one. Consider if the reward is useful and valuable enough to outweigh potential cons, such as increased interest rates or annual fees. Be sure to fully understand what the reward is worth and any potential special terms and conditions.
  3. Determine interest rates: While it is ideal for you to pay your outstanding balance in full each month, it is important to understand the cost associated if you are unable. To learn how to reduce the amount of interest you will pay, check out the Government of Canada's credit card payment calculator to compare and contrast three alternative payment options.
  4. Manage your score: Having a strong credit score will greatly benefit you in the future, such as when trying to rent a property or take out a loan. Keep your credit score high by making payments on time, minimizing outstanding balances, and limiting taking on new debt.
  5. Check your card: Keeping track of your expenses throughout the month will help ensure that you have the funds available to pay your bill when it comes due. This will also help you catch any suspicious activity that could be signs of fraud.
Building a Strong Credit Score

Using credit such as a credit card or a student loan is a normal part of being a student, but building a strong credit score early is essential to your future financial success. Having a strong credit score represents your ability to manage your money wisely, and this can impact you in a number of situations, such as qualifying for a lower interest rate on loans. The best thing you can do is to keep your credit score as high as possible, and there are a number of ways you can do that:

  1. Pay on time: Paying your bills by the deadline has the greatest effect on your credit score, so be sure to pay yours on time - even if they are small! No matter what, always make the minimum payment on your debts!
  2. Slow and steady: Try not to borrow more money than you can afford to pay back. If you take on too much debt at once, it can be difficult to recover.
  3. Manage your limit: It's recommended that you aim to use less than 35 per cent of your available credit limit. The closer you are to your limit, the greater risk you face of not being able to pay it back on time. While it is best to pay your balances in full, even making the minimum payment is better than none at all.
  4. Length of credit history: It's a good idea to start building credit early because the longer your history, the more accurate your credit score will be. Starting to build your credit now will help you when wanting to borrow for larger items in the future.
  5. Minimize credit applications: Just like it can be a bad sign to an employer if you get a new job every month, applying for additional or new credit too frequently can reflect negatively to lenders. It may leave the impression that you are struggling financially. Try to reduce the number of times you apply for credit over a relatively short period of time.
Tackling Student Debt Post-Graduation

Managing debt is a difficult task for many students, but staying on top of your expenses can help reduce the stress. For some of you, this may be the first time you've had to balance your debt and daily expenses. It's never too early to start thinking about building a healthy financial future, so here are a few tips on how to stay on top of your student debt:

  1. Utilize your grace period: Depending on the loan, you may have a grace period after you graduate before you have to start making payments. Use this time to understand your loan and make a game plan on how you will pay it off. If possible, put money away as if you are already making payments to get yourself used to this change.
  2. Live consciously: Although you will likely want to start splurging now that you aren't living the money-tight life of a student, continuing this cost-saving lifestyle for a few years can help you pay off your loans as fast as possible. Keep your costs low by living with a roommate or sticking to the necessities.
  3. Make a budget: Once you graduate you may have a number of new expenses that you aren't used to. It'll be important to keep track of your spending in a budget to make sure you can put additional money towards your debt.
  4. Increase your income: If you find yourself a little strapped for cash, try a new way of earning more money. Maybe you can use one of your interests to start a side business, such as offering photography or tutoring services.
  5. Start saving: After you have your student loans paid off, you can focus on allocating some of your paycheque to a savings account. It may seem early to contribute to an RRSP or a TFSA, but the sooner you start saving regularly the more likely you will be a great saver in the future. Plus, saving while you are living a lifestyle with less major expenses is an easier place to start.