Your roadmap to a student debt-free future

You’ve got the diploma, but now you have to deal with your student debt. Depending on the size of your loans, this could take months, years or decades to repay. With road blocks like changing interest rates and unexpected expenses, imagining yourself student debt-free may seem like something in the distant future – but it doesn’t have to be.

There are many ways you can shorten your path to becoming debt-free. Follow these tipStudent Debts and a student debt-free future could become your reality much sooner than you think.

Starting off – where are you now?

Whether you’re a new grad or you’ve been in the working world for a while, you’ll eventually have to begin your journey to repay your student debts. Like a road trip with friends or a hike into the wilderness, it’s best to start by assessing where you stand. Take inventory of your student debt from all institutions and your available finances. Having a clear picture where you stand today is an important first step when looking towards the future.

It can seem like a long trip, but with the proper planning and financial guidance, you can reach your debt-free destination sooner than you think.

Planning – create your repayment roadmap

Now that you know where you stand and where you want to go, it’s time to start the planning process. It’s a great idea to use a loan repayment estimator to map out how much you owe and make a monthly repayment plan that works for you. As soon as you can, you should establish a concrete plan for repaying your loans and pay as much as you can, as often as you can.

There are some things you should consider when you’re finalizing your plan:

  • What’s your interest rate? Your interest rate is perhaps the most important factor when it comes to creating your repayment roadmap. A higher interest rate means you should try as hard as possible to pay your loan off faster to avoid needlessly paying interest. For example, if you take 10 years to pay off a loan of $10,000 at 3.5 per cent, you’ll have paid $4,878 in interest. Compare this with an interest rate of 7.5 per cent on the same $10,000, on which you’ll pay $7,565 over the same amount of time. That’s a difference of $2,687.
  • How much income are you currently bringing in? Bringing in more cash means you can make higher payments on your loan – simple as that. Figure out what your current income is from all sources and how much of it you can safely put towards your student loans.
  • Do you have other debt at a higher interest rate? If you do, it’s wiser to pay this off before putting everything you can into your student loan. Financially, it’s smarter to pay off $1,000 in credit card debt at a 19 per cent interest rate before putting all of your available money into your student loan at 3.5 per cent.
  • Do you have student loans from the government? If your loan is from the government (federal, provincial, or territorial), a non-refundable tax credit is available for the interest paid on the loans each year. You may be eligible to claim this amount for the year the interest was paid, or preceding five years. Unfortunately, this tax credit does not apply to interest payments made on student loans held with private lenders, such as banks. Regardless, this is a great bonus – you can put the money you receive from your tax return directly towards repaying your student loan.

Setting off – repaying your loans

You’ve assessed your situation; you’ve planned your journey, now it’s time to hit the road. Your first step will be to set up loan repayments with your financial institution. This can be done in several ways – from weekly, bi-weekly, to monthly. Bi-weekly is often considered a smart option, but can be tougher to manage due to the higher frequency of payment withdrawals.

Once you’re set up and making payments, your trip shouldn’t end there. Instead of coasting until you’re debt free, consider shifting gears on your plan if your financial situation changes over the course of your repayment period. Get a promotion? Inherit some extra cash? Win the lottery? Take that windfall and increase the amount you’re repaying.

There’s one more important thing to know – you don’t have to take this trip alone. I can help make your journey more bearable. I can help you design your debt repayment roadmap, help sort out possible roadblocks, and potentially help you find ways to repay your debt faster. It can seem like a long trip, but with the proper planning and financial guidance, you can reach your debt-free destination sooner than you think.

We All Have a Credit Score – What’s it Mean?

We all have a credit score – a number between 300 and 900 used by potential lenders, employers, landlords, and in some provinces insurance companies – to help judge our financial reliability. Yet, few Canadians know their credit number, or even understand how this rating is created and how their actions can change the score.

Unless you live in a mortgage-free cave with no Internet, two companies – Equifax Canada and TransUnion Canada – are tracking your every credit movement. Banks, utilities, former landlords and anyone else who issues credit and loans feed these two agencies the information that forms your credit history.

You typically need to provide consent for someone to see your report – check the small print in that lease application.

A good credit rating will not only help you secure loans, it will also help lower the interest rates you’re charged. There are many ways to improve and even rebuild your credit score.

Credit Score

They know what about me?

Canadians should regularly contact both Equifax and TransUnion to get a copy of their credit report for free. The agencies may charge fees for expedited service and to get your actual score. Mistakes happen so this is the time to fix them. Plus, in the age of identity theft, credit reports will show you if anyone has applied for a loan under your name. If you find an error on your report, you can request a correction from the reporting agency and, if needed, from the lender directly. If you are not satisfied, you are entitled to add a brief “consumer statement” to offer your side of a story.

The report includes basic personal information, including date of birth, current and former addresses, social insurance number, driver’s licence number and current and past employers. The credit history information lists your loans, bank accounts, credit cards and any other form of credit, including telecom bills. Late payments, liens, bankruptcy judgments, debt sent to collection agencies and repossessions are all included.

Where does it all begin?

A credit card is usually the first step in a credit history. Student loans and mobile phone plans are also tracked. Just like posting an ill-advised YouTube video, missing payments on that first credit card can haunt people for years. Credit issuers take many other factors into consideration. However, having no credit record could raise a warning flag in some instances.

Tips to score well

  • Pay your bills on time, ideally in full but always the minimum.
  • If you cannot make a loan payment, work with the lender to find a solution.
  • Don’t max out your credit. Regularly going beyond half of your credit card and personal lines of credit limits suggests you may have a spending problem.
  • Avoid looking desperate – don’t apply for too many credit cards and loans. If you are shopping for a car loan or mortgage, do it all within a short period of time, so those inquiries into your credit history are lumped together.
  • Read all your banking and utilities statements very carefully.
  • Stability matters so keep credit accounts open – even if they’re not used much.
  • When applying for a big loan or mortgage, consider decreasing the credit limits on your credit cards. A lender will consider unused credit a liability.
  • 1According to Equifax, about 57 per cent of Canadians have an excellent credit score of 760-plus.

Rebuilding credit takes time

It can take time to turn your credit rating around, but it’s possible. Black marks take up to seven years to be removed from your credit history. Bankruptcies are also removed after seven years but judgments can be renewed for up to 10 years.

There are ways to start turning things around. For example:

  • Apply for a secured credit card. Give the bank, say, $1,000 and ask them to issue you a card with a $500 or $1,000 limit.
  • Ask a relative with a strong credit score to add you to their approved user list on their credit card.
  • Ask a relative to co-sign for your credit card or loan.
  • Close credit cards or lines of credit you’re no longer using so they’re not part of your credit history review.

The majority of Canadians have earned an excellent credit score. Understanding how this all works can serve you well when negotiating loans and can help you achieve your future goals.