Banks, credit bureau agencies, hiring agencies, and even peers have done a great job in attempting to tie our self-worth or societal standing to our credit rating. I hear people say to me every day “I want to solve my debt but I don’t want to damage my credit rating”. I fully understand what people mean when they say this. I also fully understand that they are saying it from a place of perceived reality. Let me explain with two quick and simple truths.
Simple Truth 1: What does a good credit rating really mean?
- A good credit rating is in the eye of the lender, not the eye of the borrower.
Indulge me for a minute; if someone is carrying 20k, 30k, 60k of credit card debt who came to you and asked for a $10,000 loan, would you jump at the chance to lend to that person and make a profit?
On the other hand, if the individual were cash flowing with little to no debt and maybe a small amount of savings in the bank, would you likely be more apt to lend to that individual?
What creditors consider when extending consumer credit
Amount of credit used and debt service ratio are two items that lenders look at when considering extending credit. Is the borrower currently using a great portion of the credit extended to them while looking for more credit and/or how much of the borrowers current income is going toward servicing the existing debt?
Making your credit card and loan payments every month for years without a hitch, along with carrying a 750 credit score, are not the only two things that lenders look at.
I am constantly meeting with people who have a great credit score and have not missed any debt payments, but they are in my office because their bank would not give them a consolidation loan, neither are they cash flowing.
Simple Truth 2: What is financial security?
Now to address burning cash in order to have a great credit score.
Would you rather have cash flow with a bad credit rating, than be broke every month with a great credit rating?
It’s true! When did we get this idea that a credit rating was a status symbol and that we should go broke trying to service it?
How to calculate a real debt repayment plan
If one wanted to make a plan to pay off all of their credit debt in 5 years, the general estimating rule is to take that credit card debt and multiply by 2. Divide that number by 60 (months) and there you should have a ball park number as to what the monthly cost will be.
But hold on, it doesn’t stop there… you have to pay income tax on the monies earned in order to solve the debt. So paying off 50k of credit card debt in 5 years would cost approximately $1665 per month based on the aforementioned plan.
In order to take home $1665 per month after income tax, one would have to earn approximately $2200 per month gross income.
So in other words a gross income of $2200** x 60 (months) = $132,000 gross income to pay off $50,000 of credit card debt in 5 years.
** This does not include paying for all your regular living expense.
Now that plan can no doubt work for some. It can work if there are no so called hiccups along the way. It can work if there is a savings plan and rainy day fund in place. It can work if interest rates on the mortgage don’t go up, or that vehicle which is out of warranty but still has payments on it doesn’t break down. It can work if employment or business stays steady. I won’t go on.
What I am saying, is that with the cost of living today, and the need to pay for life as it happens, 50k of credit card debt can be a real and serious challenge.
How can you get out of debt fast
On the flip side, imagine if only half of the $1665 went to savings each month for those 5 years. That’s $50k in savings.
I will say this, many times people come into my office with the above concern of not damaging their credit rating and many times that same individual two years later has substantially reduced their debt, cash in savings, and a better credit rating then when they came to us due to following the plan we put in front of them.
Don’t be afraid of aggressively solving the debt. But do be afraid of not being informed as to all of the options to solve debt. We have a financial system that is built and based on debt. There are completely legitimate ways to solve debt and get back into a positive financial position without having to wear the proverbial scarlet letter.
Our debt based financial system is dependent on that. It has actually been written in to Canadian law that debtors (whom I call clients) are allowed relief from the crushing burden of debt, offering then a fresh start in terms of being able to manage their financial affairs.
In saying that, I have heard many lies purveyed to people who are in debt as to why certain services from different companies or organisations should or should not be used.
There is a lot of “mis” and “dis” information out there when it comes to dealing with debt. I can honestly say in public forum and I say it every day, there is no company that I have yet come across in Canada who has the ability to solve debt, rebuild credit, and put people into a positive cash flow position like 4 Pillars Consulting Group.
Be sure to check in for my next post where I will talk about the different role “debt companies” can play. Many of them do not work for the debtor but instead the lenders. This little but very important non-disclosed fact can drastically affect the outcome for the individual.
Darrell Pauls
Red Deer Office
Tel: 403-755-1757
