TD Canada Trust: How to stress-test your debt
(NC) — Paying for university, buying a home and managing unexpected expenses – there are plenty of reasons to borrow money to help manage cash flow. Believe it or not, some debts can also help deliver a positive financial return if managed responsibly.
“Not all debt is created equal,” said Stephen Menon, Associate Vice President, TD Canada Trust. “Using credit responsibly requires an understanding of the type of credit you carry or the type of credit available to you. Start by taking a look at all of your debts, and distinguish between those that can actually work for you to help meet your goals, and those that should be prioritized for repayment.”
Menon said people should review their finances and answer three important questions about their debt:
• Am I living within my means? The benefits of credit products can be outweighed if too much debt is being taken on. As a general rule, people should not carry a debt load (including housing costs) any higher than 40% of their total monthly gross income. An individual with an income of $65,000, for example, should not carry a total debt load requiring more than $26,000 in payments each year.
• Which debts will help or hamper me? Carrying a balance on a credit card to fund short-term lifestyle spending is not advisable, and this type of debt should be paid off immediately. In contrast, some credit products can help deliver a positive return if used responsibly. This could be using a home equity line of credit to fund renovations to potentially increase your home's value, or using a rewards credit card and repaying it promptly to accumulate rewards such as cash rebates that you use towards future bills and expenses.
• How can I pay off 'high-priority' debts faster? Set up a regular preauthorized payment to automatically transfer a portion of each pay cheque to make debt repayments without having to think about it. Revisit your monthly budget to identify ways to curb spending and work to gradually increase repayments over time. Every little bit will help, and chances are you will not even miss that extra $5 or $10 a week.