Credit can be a useful tool in your financial planning, but unfortunately it can also result in financial disaster if it is not well planned and carefully thought through. There are certain facts you should know about making purchases on credit, both regarding your own financial position and about the types of credit available to you. You should be aware of what amount of credit you can realistically afford. And what to do if you’ve taken advantage of too much access to credit.
The goal of your financial institution should be to help you make well-informed decisions and to show you how to avoid potential problems.
The first question to ask yourself is “Do I really want or need the item, or am I falling into buying on impulse?”
Because personal credit is available to most people in the form of a credit card, it is often too easy to buy something. When cash doesn't change hands, it can seem as if you aren't spending real dollars. Don't let the convenience of a credit card lure you into extravagant or foolish spending.
How can I make important purchases or emergency expenditures and still save for the future?
You may be considering the purchase of investments such as GICs, RRSPs, and other investments. They generally have higher rates of return than a savings account, but the funds may be locked in for a period. This leaves some people fearful of not having access to cash for emergencies or important purchases. By using credit responsibly, you can maximize the return on your cash savings―you can place savings into those higher interest-bearing products, and then borrow as needed when special expenses come up. Consider obtaining a line of credit and keep the majority free for this purpose. And, if you stagger the maturity dates of your investments, you can use maturing investments to make regular payments on your borrowing.
If you wait until you have enough money saved to pay cash for an item, will the price increase substantially in the meantime?
Higher-priced purchases, such as select major appliances and cars, tend to become more expensive from year to year. Unless you can save quickly, it may be advantageous to make use of a loan to buy the item sooner, rather than later―provided that your budget can accommodate repayment of the loan out of current income.
If you are making a long-term credit commitment, how secure and stable is your financial situation?
For most people, a purchase such as a house is possible only by means of a mortgage loan. In determining how much you can afford to pay each month, be sure you leave yourself some breathing room. You should still be able to set aside some savings for emergencies. If your employment situation changes and your monthly income is decreased, consider if you will still be able to meet your payments.
Using credit can benefit you in many ways. But if a loan or credit repayment is not carefully budgeted, it can lead to financial strain, possibly to the point when you can't make payments.
Before using credit, you should determine how much you can realistically afford.
How much credit is enough?
A general way to express how much personal credit an individual can comfortably handle is the Total Debt Services (TDS) ratio. It says that no more than 40% of your monthly gross income should go toward monthly debt obligations including mortgage payments. The amount of credit you can afford depends partially on your personal situation. For example, if your current employment is not secure, the amount of credit you will want to take on will be less than the recommended guidelines.
One wise rule of thumb for all borrowers is to borrow only enough to make the planned purchases, rather than as much as you can possibly be approved for. Having so many credit obligations that you only just make ends meet, could place you in serious financial trouble with one unexpected expense.
To determine how much credit you can comfortably afford, you should establish a saving and spending plan. At OMISTA Credit Union, our financial services rep-resentatives help people assess their financial goals in comparison to their income and expenses, as well as look at their current financial products and areas for savings. We can help you improve your financial literacy, show you how to reach your short- and long- term goals, and help reduce financial stress.
We’d love to hear from you.
What makes a credit union different from a bank?
Like other financial institutions, credit unions provide chequing accounts, mortgages, business loans and investment advice. But credit unions are full-service financial co-operatives. This me-ans we are owned by our customers.
Credit unions do not pursue profits for the sake of rewarding shareholders’ quarterly-return expectations. They pursue profits to fund the business and to ensure future generations can benefit from the co-operative model and excellent banking services.
Credit unions are grounded in the prosperity of the communities they serve. Locally, this spirit drives community and economic impact and inspires innovative approaches to everyday banking.
OMISTA Credit Union: 878-5421
Trisha Leaver, OMISTA's Senior Marketing Manager, has a passion for sharing the credit union difference and empowering New Brunswickers to choose a better way to bank.