{"id":782633,"date":"2021-04-06T15:57:06","date_gmt":"2021-04-06T19:57:06","guid":{"rendered":"https:\/\/www.fool.ca\/?page_id=782633"},"modified":"2021-10-08T14:40:57","modified_gmt":"2021-10-08T18:40:57","slug":"debt-and-credit","status":"publish","type":"page","link":"https:\/\/www.fool.ca\/personal-finance\/debt-and-credit\/","title":{"rendered":"Debt and Credit"},"content":{"rendered":"<p>&nbsp;<\/p>\n<nav class=\"pf-ribbon\">\n<ul class=\"pf-ribbon__list\">\n<li class=\"pf-ribbon__item\"><a class=\"pf-ribbon__link\" href=\"https:\/\/www.fool.ca\/personal-finance\/credit-cards\/\">Credit cards<\/a><\/li>\n<li class=\"pf-ribbon__item pf-ribbon__item--has-sub\"><a class=\"pf-ribbon__link pf-ribbon__link--current\" href=\"https:\/\/www.fool.ca\/personal-finance\/\">Personal finance<\/a><input id=\"pf-ribbon__check1\" class=\"pf-ribbon__check\" type=\"checkbox\"><label class=\"pf-ribbon__label\" for=\"pf-ribbon__check1\"><\/label><br \/>\n<nav class=\"pf-ribbon__submenu\">\n<ul class=\"pf-ribbon__list\">\n<li class=\"pf-ribbon__item\"><a class=\"pf-ribbon__link\" href=\"https:\/\/www.fool.ca\/personal-finance\/the-ultimate-personal-finance-checklist\/\">Personal Finance Checklist<\/a><\/li>\n<li class=\"pf-ribbon__item\"><a class=\"pf-ribbon__link\" href=\"https:\/\/www.fool.ca\/personal-finance\/personal-finance-basics\/\">Personal Finance Basics<\/a><\/li>\n<li class=\"pf-ribbon__item\"><a class=\"pf-ribbon__link\" href=\"https:\/\/www.fool.ca\/personal-finance\/taxes\/\">Taxes<\/a><\/li>\n<li class=\"pf-ribbon__item\"><a class=\"pf-ribbon__link\" href=\"https:\/\/www.fool.ca\/personal-finance\/mortgages-and-housing\/\">Mortgages + Housing<\/a><\/li>\n<li class=\"pf-ribbon__item\"><a class=\"pf-ribbon__link pf-ribbon__link--current\" href=\"https:\/\/www.fool.ca\/personal-finance\/debt-and-credit\/\">Debt<\/a><\/li>\n<\/ul>\n<\/nav>\n<\/li>\n<li class=\"pf-ribbon__item\"><a class=\"pf-ribbon__link\" href=\"https:\/\/www.fool.ca\/investing\/\">Investing<\/a><\/li>\n<li class=\"pf-ribbon__item\"><a class=\"pf-ribbon__link\" href=\"https:\/\/www.fool.ca\/investing\/best-online-brokerages-in-canada\/\">Brokers<\/a><\/li>\n<\/ul>\n<\/nav>\n<h2 class=\"sepbar\">Credit and debt in depth<\/h2>\n<div style=\"float: left; width: 50%;\">\n<ul>\n<li><a href=\"https:\/\/www.fool.ca\/personal-finance\/debt-and-credit\/boost-your-credit-score\/\">Boost your credit score in months<\/a><\/li>\n<li><a href=\"https:\/\/www.fool.ca\/personal-finance\/debt-and-credit\/quick-guide-to-getting-out-of-debt\/\">A quick guide to getting out of debt<\/a><\/li>\n<li><a href=\"https:\/\/www.fool.ca\/personal-finance\/credit-cards\/negotiate-with-your-credit-card-lender\/\">How to negotiate with your credit card lender<\/a><\/li>\n<li><a href=\"https:\/\/www.fool.ca\/personal-finance\/credit-cards\/what-is-apr-and-how-does-it-work\/\">What is APR and how does it work?<\/a><\/li>\n<li><a href=\"https:\/\/www.fool.ca\/personal-finance\/credit-cards\/what-is-a-good-credit-score\/\">What is a good credit score?<\/a><\/li>\n<\/ul>\n<\/div>\n<div style=\"float: right; width: 50%;\">\n<ul>\n<li><a href=\"https:\/\/www.fool.ca\/personal-finance\/debt-and-credit\/8-ways-to-pay-off-debt\/\">8 ways to pay off debt<\/a><\/li>\n<li><a href=\"https:\/\/www.fool.ca\/personal-finance\/debt-and-credit\/perfect-credit-score\/\">Is a perfect credit score possible for you?<\/a><\/li>\n<li><a href=\"https:\/\/www.fool.ca\/personal-finance\/debt-and-credit\/how-to-reduce-your-debt\/\">How to reduce your debt<\/a><\/li>\n<li><a href=\"https:\/\/www.fool.ca\/personal-finance\/personal-finance-basics\/how-to-create-a-budget-youll-actually-keep\/\">How to create a budget you&#8217;ll actually keep<\/a><\/li>\n<\/ul>\n<\/div>\n<hr>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/www.fool.ca\/personal-finance\/credit-cards\/\">Credit cards<\/a> are one of the most popular financial products in Canada. When used right, they can help you boost your credit score, rack up lucrative rewards, and get bonuses and benefits no debit card can offer you.<\/p>\n<p>But that\u2019s the trick, isn\u2019t it? To enjoy credit cards, you have to learn to borrow money responsibly. Whether you\u2019re using credit cards, personal loans, or even student loans, borrowing recklessly can leave you in a massive debt hole, and though it\u2019s not impossible to get out debt, it\u2019ll be a lot harder than getting in it.<\/p>\n<p>At The Motley Fool, we understand the problems and stress that credit cards and debt can create. Our company was founded on helping people build their wealth through <a href=\"https:\/\/www.fool.ca\/investing\/\">smart investing<\/a>. But that can\u2019t (or, at least, shouldn\u2019t) start until you\u2019ve dealt with debt problems.<\/p>\n<h2>How much debt should you have?<\/h2>\n<p>Ideally, zero.<\/p>\n<p>But we know that\u2019s not always possible, especially with a mortgage. What is especially important is to keep high-interest, \u201cbad\u201d debt at, or as close to zero as possible.<\/p>\n<p>At the very least you want to keep your debt-to-income ratio below 35%. To figure out your ratio, multiply your monthly debt payments by 12, then divide by your annual gross income.<\/p>\n<h2>How does debt work?<\/h2>\n<p>On the surface, debt seems simple. You borrow money from a lender, then pay it back. But beyond that, debt involves some additional factors you should be aware of.<\/p>\n<p><strong>1. Debt has principal and interest <\/strong><br \/>\nThe principal is the amount that you borrowed. The interest is the price you pay to borrow money, and it\u2019s determined by your interest rate. When you make debt payments, you pay back a portion of the principal along with interest.<\/p>\n<p><strong>2. Credit cards have minimum payments <\/strong><br \/>\nYes. And they can be a trap. Every month, you pay at least the minimum to avoid late penalties and damage to your credit score. But if you pay only the minimum, you\u2019ll be in debt for a long time. Ideally, you should pay off your credit card balance in full before your billing period ends.<\/p>\n<p><strong>3. Debt affects your credit score<\/strong><br \/>\nYour <a href=\"https:\/\/www.fool.ca\/personal-finance\/credit-cards\/what-is-a-good-credit-score\/\">credit score<\/a> is a three-digit number that tells lenders how well you handle debt payments. The less unpaid debt you carry, the fewer payments you\u2019ve missed, the higher your score will be.<\/p>\n<h2>How Can You Get Out of Debt?<\/h2>\n<p>Confronting mounds and mounds of debt can feel overwhelming, not to mention terrifying. But you can take control. Here are some common debt repayment strategies.<\/p>\n<p><strong>1. Debt Snowball <\/strong><br \/>\nWith the debt snowball, you prioritize paying off debt with the smallest balance, then work your way to bigger debts. Since you pay debt faster in the beginning, you gain momentum (hence \u201csnowball\u201d), helping you muster the confidence to pay off bigger debts.<\/p>\n<p><strong>2. Debt Avalanche<\/strong><br \/>\nUnlike the debt snowball, the debt avalanche prioritizes debt with the highest interest rate. You may not move as quickly as you would with the debt snowball, but you\u2019ll likely save more money in interest over the long-run.<\/p>\n<p><strong>3. Debt Consolidation<\/strong><br \/>\nFinally, you could combine all your debts into one, which you then fire all cylinders until it&#8217;s paid off. The benefit of a debt consolidation is you can simplify your debt strategy, reduce the likelihood of overlooking a due date, and possibly lock into a lower interest rate. <a href=\"https:\/\/www.fool.ca\/personal-finance\/credit-cards\/best-balance-transfer-credit-cards\/\">Balance transfer credit cards<\/a> are one potential way to consolidate debt when you are struggling with credit card debt.<\/p>\n<h2>How Can You Use Debt Responsibly?<\/h2>\n<p>Some financial gurus claim debt is a slippery slope: once you start, you\u2019ll be swimming in unpaid balances in no time. But nothing can be further from the truth. When used responsibly, debt can help you advance your own financial goals, as well as rack up rewards you can get nowhere else. Here\u2019s how to use debt like an adult.<\/p>\n<p><strong>1. Budget your expenses <\/strong><br \/>\nBefore the month begins, make a plan for how you\u2019ll spend your income. It may seem like a pain, but trust us &#8212; guardrails will help you avoid overspending.<\/p>\n<p><strong>2. Don\u2019t overcharge credit cards <\/strong><br \/>\nSwiping plastic for purchases you can\u2019t afford is a surefire way to go into debt. Let <a href=\"https:\/\/www.fool.ca\/personal-finance\/personal-finance-basics\/how-to-create-a-budget-youll-actually-keep\/\">your budget<\/a> make the spending decisions, not your emotions.<\/p>\n<p><strong>3. Keep an emergency fund<\/strong><br \/>\nHaving three to six months of emergency expenses set aside will stop you from reaching for loans or credit cards when a major expense pops up.<\/p>\n<p><strong>4. Pay your balance in full <\/strong><br \/>\nWhen you only pay the minimums, you rack up interest charges. Pay exactly what you borrow, and you\u2019ll pay less over the long-term.<\/p>\n<p><strong>5. Know when to stop <\/strong><br \/>\nIf you\u2019re racked up more debt than you can pay, it\u2019s time to put the card away. Focus on paying down debt before you accumulate more.<\/p>\n<hr style=\"margin-bottom: 50px;\">\n","protected":false},"excerpt":{"rendered":"<p>&nbsp; Credit cards Personal finance Personal Finance Checklist Personal Finance Basics Taxes Mortgages + Housing Debt Investing Brokers Credit and &hellip;<\/p>\n","protected":false},"author":28430,"featured_media":0,"parent":488,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"_acf_changed":false,"ep_exclude_from_search":false,"footnotes":""},"tickers_global":[],"class_list":["post-782633","page","type-page","status-publish","hentry"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.4 (Yoast SEO v23.4) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Debt and Credit | The Motley Fool Canada<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.fool.ca\/personal-finance\/debt-and-credit\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Debt and Credit\" \/>\n<meta property=\"og:description\" content=\"&nbsp; 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