Tommy: She’s back with another a whirlwind of fantastic advice, Lama Farran. If you have debts spread out in different places is it a good idea to lump it all together? Consolidating your debt is an option for many people that are stuck in debt. How do you know it’s right for you? My next guest is here to fill you in on everything that you need to know on making those right choices. Lama Farran i s certified money coach and the founder of a terrific website, that I suggest you check out, called maxworth.ca. And she joins me now, good morning welcome back. Now I just introduced you as a certified money coach. A lot of people listening don’t know what a money coach is. What’;s a money coach?
Lama: Yeah, I get a confused with financial planners. The money coach has a different approach than a financial advisors, as I don’t focus on retirement. It’s about day to day budgeting, how do I get out of debt, how do I stop myself from going more into debt. So it’s really a more practical approach to money. The other thing I focus on is the psychological side of money, which is what we’re going to talk about a little bit, which is how a lot of people get into debt. If you do get a debt consultations, it’s really important to go back and look to see what got you in that spot to begin with. And this is something that I help people with to really direct their pasts, and beliefs and money patterns so they don’t find themselves in the same situation again.
Tommy: For someone who might not understand, what does it mean to consolidate your debt?
Lama: Debt consolidation is when you have three four credit cards, a couple loans, a couple line of credits and the interest rates on them are just huge. So you take them all and you get one loan to pay all of them off. Now, hopefully the interest rate on that loan will be lower than what you will be paying so it will take you less time. Also it’s less of a hassle because you’ll have one payment versys three or four or five different payments. Some people will look at it as your borrowing from Peter to pay Paul, it is a little bit like that cause you’re still in debt, you still have the same amount of debt but it’s a lower interest rate and it’s more manageable because it’s one amount versus different amounts. Now there are different ways of getting a consolidation loan. You can go to your bank, if you have good credit, a good job with a good salary you might get a loan. Of course they want to see some security, so they might ask to put it on your home, to re finance your home. So you can refinance your mortgage, of course that assumes you have enough equity in your house, or you can take a second mortgage. Or what some people do if they have enough room on their home line of credit then they just put it on their home line of credit.
Tommy: But isn’t there a great danger because I remember the way consolidation loans used to be. You would go to the bank, the bank would arrange it. Let’s say you have four different credit cards, you would bring them in, you would cut up three of them there in eh managers office, and keep one that you would need for emergencies. Cause they wouldn’t want you to walk out of the bank saying, okay only one credit card. All with zero balance, wow that TV looks appealing, and just go spend it immediately.
Lama: Yes, that’s the number one danger of debt consolidation loans. Cause it’s such an easy solution that people are so tempted to get back in debt. So this is where the psychology work comes in and really digging and seeing how did i get myself there and what’s my action plan so that it’s doesn’t end up happening again. I was just reading a statistic about consumer proposals. Consumer proposals are different, it’s kind of a debt consolidation but really it’s one step behind bankruptcy. I read that one out of five people who do a consumer proposal need a second on later in life. So, it means that they did not learn their lesson.
Tommy: i don’t think people understand what an important role that psychology has on why your debt.
Lama: It has a big big impact because really if you think about it money is very simple arithmetic. And I’m sure everyone is smart enough to understand that the money that comes in minus the money goes out equals a certain amount. We all get this very simple concept so why is that people are in debt? It’s not that we’re not smart enough to get this. It’s because there are other things in our subconscious mind and in our past that are pushing us towards being in debt. Such as feeling inadequate for example, I don’t feel like I’m enough. I need a bigger house, a better car, I need to show off to all my friends on Facebook that I’m living a better life than them on the expense by putting it on your credit card.
Tommy: interesting question here from this text. I have ten credit cards, they all have zero bonus I paid then off a few months ago. My question is does it affect my credit rating if I keep them at zero balance, or is it better if i cancel them?
Lama: It’s better to have a couple cause if you cancel them you won’t be building any credit history. So it’s good to have a few at zero. You use them from time to time and keep them at a very low utilization rate.
Tommy: You’ll love this Lama. I don’t think you’ve ever gotten this question before. Your questions for Lama Farran, certified money coach you can test them to 514-800. Crazy question, did you ever tell a client not to buy a private plane?
Lama: Well I haven’t had a client who needed a private place, but yeah I would advise them not to buy one. Why in the world would you need a private plane even if you could afford one. Jus travel first class all time.
Tommy: Alright good solution. This is a good text. What if I don’t have good credit because of personal problems?
Lama: Well there are ways to rebuild your credit, so it is what it is now. So you can start paying back on time. You can lower your utilization rate of the card/ When i say utilization rate, it’s what is the balance versus your limit. So you can work on decreasing it. It’s very important that you pay at least the minimum on time. So that impacts a little bit. There might be also, some inquiries and things like that. So there are a few things you can do to fix the credit score, it’s not damaged forever.
Tommy: Let’s talk about some of the tricks that the banks pull and how to be aware of them. One of the things I notice from one bank, they said that if you miss the payment date, more than twice, during a twelve month period, they increase your interest rate by 5% twice. Not twice in a row, twice during. So in other words you might be a few days late, not thinking about it, and then you pay it all on time and seven months later you miss it again, all of a sudden you’re going to be paying a lot of interest.
Lama: It could be because now you’re tagged as higher risk person who is not paying one time. So it’s very important even if you’re just planning on paying the minimum payment, the moment you get your credit card statement log in online and put a post dated payment before the due date, that way you don’t have to forget it, it doesn’t go through the cracks. When you miss a payment that means your a higher risk borrower.
Tommy: This text is saying that if you consolidate your credit see it as a bankruptcy and it doesn’t look good. It’s best to get a lower interest loan and pay it off. Not everyone is in debt because you spend money, it has to do with things that happen in your life like divorce and supporting children and paying child support. They won’t see consolidation as bankruptcy would they?
Lama: No. Just the debt consolidation loan from the bank is not a bankruptcy. Consumer proposal will show up on your credit report, because a consumer proposal will back your full debt and you’re paying part of it. It’s an agreement that you’re making with the creditors and that will show up on your Credit Bureau.
Tommy: Tommy do cash advances on your card affect your credit rating more than consumer good purchases?
Lama: No. But the thing with cash advances is that you’re paying interest the second that you withdraw the money. You’re paying interest much faster than just buying in the store.
Tommy: The money coach lady is correct, I consolidated and now I am debt free. This text says, if you don’t consolidate your credit card, does that hurt your rating?
Lama: It’s a good idea. It’s the same thing as the caller before, it’s a good idea to keep some at zero that are there. Cause you want to show that you have credit cards and that you’re responsible enough to not max them out.
Tommy: Your questions for money coach Lama Farran. This texter says my broker suggested using my home equity line of credit 3%, just to invest in my TFSA to yield a higher rate than 3%. Would having this money owing for an extended period of time hurt my credit rating?
Lama: It wouldn’t necessarily hurt your credit rating, but i t’s about the bigger risk, the leverage investment that he is about to make. What if that TFSa does not make 3% or more? Is he going to be able to sleep at night? If he’s okay then that’s okay. The other thing that may happen to his credit, is how much on his line of credit is he borrowing? Is it going to completely maxed out, or will there be enough left for emergencies and to show that he is not maxed out.
Tommy: also do the banks look at what you’re doing with your line of credit. In other words to see if it’s going up and down and fluctuating back and forth, or if it’s always going higher and higher higher.
Lama: They like it when it goes higher higher and higher. They don’t really, they aren’t going to ask you what or how did you spend the money. It could be that you put a pool, or you gace it to your kids for school or you went on vacation. They don’t really care.
Tommy: and they also know that what people do when they have to make the payment of $500 they will withdraw $1000 and pay $500 of it back.
Lama: Yes, you’re robbing Peter from Peter
Tommy: Alright this texter wants to know what you think of Balance Protector Services offered by different Credit Cards. They say that they will cover your payments if you lose your job.
Lara: Yeah that’s a great one. It’s a genius money making scheme from the bank. Not only are you paying interest but they found a way to have you pay more money on the money you own. It’s the worst idea on earth. It’s the best idea for the bank but the money you’re going to be spending to pay for the credit card insurance just pay towards your credit card and try to get rid of the balance ASAP.
Tommy: Also in many cases, people don’t understand what the insurance is. It’s not if you get sick or lose your job, they aren