Category Archives: Credit

Use Sink Funds for Bills

Recently I’ve been thinking about using something akin to a sink fund within our budget.

A sink fund is a business term used by some companies that issue bonds. They may set up a sink fund that, basically, saves money to use toward paying back the principal on their debt. That is to say, the money is still in their possession, but it is earmarked for paying back debt and can’t be used for anything else.

The idea goes as follows: set up a separate high interest savings account and label it, say, credit sink fund. Use your card as usual, but when you get home after any purchase, jump online and transfer the corresponding amount from your main saving/checking account to the credit sink fund.

Do that for the month until your payment date comes, and then pay off your credit card balance using your sink fund.

What advantage does this have?

In real terms, absolutely none. Psychologically, however, I think it has a few benefits. First and foremost, there is absolutely no surprise when your bill comes. Since you have been adding to your sink fund throughout the month, you would be constantly aware of how much you have owing. Linked to this, you would never have to think about what is in your checking account. Anything in the account is yours to do as you wish, because you have already taken care of your credit through the sink fund.

To a lesser degree, you would also be gaining interest in your sink fund that allows you to see the financial benefit of your interest free loan from the credit card company. (Let’s be clear, you are no better off, as the interest would have been gained in your main account. This just shows you exactly how much is a result of your using credit.)

The above mentioned DOES have a benefit over using a debit card, however, as debits are removed from your account right away, meaning you are giving up interest for the rest of the month, and any points or other rewards that are associated with your credit card.

You just need to be responsible, and pay off in full every month.

Mortgage Lenders Not Renewing

A guest writer over on the Million Dollar Journey blog reported that some mortgage lenders are either leaving the Canadian market (hence not renewing mortgages) or are only renewing if certain conditions can be met (based a lot on credit score, it seems).

Worst of all, it seems that borrowers are not being informed until 90 days before renewal.

If you have your mortgage at any of the following, you may want to first read the original post linked above (though it’s a bit of a roller coaster), and then call to see if you will be able to renew:

  • Xceed Mortgage Corporation
  • Accredited Home Lenders
  • HSBC Finance
  • GMAC
  • GE Money or
  • ResMor

No matter what, if you have good credit you won’t have a problem: you just may have to do some running around to have it renewed at a different place.

A Second Credit Card, Part 1.5

As I mentioned in an earlier post (which I consider part 1), I am in the market for a second credit card, and promised to explain why.

Don’t worry. I’m not in any financial trouble; far from it, actually. But we would like to buy a house or condo about 5 years from now.

What does that have to do with a second credit card?  Some time back I read on the Canadian Mortgage Trends blog that beyond having a good credit score, “lenders often want to see a minimum of 1-2 years of satisfactory payment history and at least two trade lines.”

Depending on which company is used, I have either a 799 or an 839 credit score, both of which are well above national averages. Still, the fact that my credit history is mostly made up of my 12-year-old credit card, a couple of inactive department store cards, and two student loans I paid off 3 years ago, it got me thinking.

Armed with print-outs of a recent credit score and report, I met with a mortgage specialist at my bank when I was in Canada last December, just to talk hypothetically. He said that based on my score and a look at my history, he would give me a mortgage at prime, but said/hinted that, yes, having a second active credit card would help, and maybe give me some more bargaining power if it had some history to it.

Since any mortgage is 5 years or so down the road, it seems like the best time to add a new card to my portfolio. First, it will give some history to the card. Second, it will take care of the second trade line. And third, by getting the card now, the effect of a lower credit score (which will happen as soon as I apply for new credit) will be made moot by the fact that it will be a five-year-old card by the time I look for a mortgage.

The only problem? In my search for my second card, I’m finding myself being very very picky. It  just may take me 5 years to select the one I want.

When Pre-Approved Credit is Good

Last night I called Visa about a few things. One of those things was to ask for a credit increase.

I don’t need a credit increase really, as I only use my credit card when I am back in Canada, but my current plan is take a temporary hit on my credit score in order to have a stellar report 4 or 5 years from now when we are  in the market to buy a place.

When I am back in Canada, I use my card for about 90% of my purchases. This results in using about 50% of my available credit. Having a high ratio (amount charged to amount available) is a bad thing for your score, so I wanted to increase my limit, so that when I travel the same purchases will only be about 30% of available credit.

The chap I was talking to said that I have a pre-approved credit increase available on my account. It was less than I was asking for, but by going this route I have achieved nearly the same effect without affecting my score.

The reason, as I was assured by the rep, is that pre-approved increases on existing accounts have no bearing on your score because it is a completely internal review; there is no inquiry into your entire credit report. It is completely based on your account history and the assets you hold with the bank.

Let’s be clear here. I am not talking about getting a piece of junk mail for a pre-approved card. That will affect your score if you apply, as it would be a new account. I am talking about a pre-approved increase on an existing card.

My next question for the lad was why I didn’t know about it. I have electronic statements, so shouldn’t I have gotten the offer by email? Not necessarily, he said. Some times the pre-approved increases are on the account, but are only mentioned if the customer happens to call.

It was nice to know that the companies aren’t always soliciting for more credit, but that there are instances where they will work with you if there is communication. That was a little reassuring.

A Look at the WestJet MasterCard

I’m in the market for a second credit card (for a reason I’ll explain in a future post) and thought the new WestJet MasterCard from RBC would be the thing. I’m not so sure anymore.

The reasons I was interested in it were:

  1. One percent of all purchases (or 1.5% for the premium card) would accumulate in WestJet “dollars” that could then be used to buy WestJet tickets.
  2. I thought the 1% card may be fee-free.
  3. I figure we will be flying a fair amount once we move to Canada, so stocking up on WestJet dollars would be of future use.
  4. It is through RBC, meaning I can easily take care of it through my online banking.

Then they announced further details of the cards. The basic card will have an annual fee of $39, and the premium card will carry a charge of $79. At $39, you would have to charge $3900 to your card just to break even of the annual fee, assuming normal purchases. Not exactly what I have in mind as a second card.

The first year would be a little cheaper, however, as the first time you use the card you are given $25 WestJet dollars ($100 for the premium card) meaning that the first year you only need to charge $1400 to break even.

Depending on your situation, how much you charge, and how much you fly, this card may be for you. If you do fly often, a bonus of 0.5% is added when you use your card to pay for WestJet tickets. Considering I currently only put about $2500 on my main card per year, I’ll have to do a little more thinking.

A Primer to Credit Scores and Reports

Keeping tabs on your credit report and score is a good idea not only so you can make sure there are no mistakes on you file, but also so you can see how lenders see you, and be armed with that information when going into any negotiations.

Essentially, you credit report is a history of how you have used credit (cards, students loans, line of credit etc.) and how you have repaid it (on time, over 30 days late, in default or receivership etc).  Your credit score is a number between 300 and 900 (in Canada) that reflects all the information in your report.

There are currently two agencies in Canada that track this information: Equifax and Transunion. They get their information from the places you have a credit history.

You can obtain a free copy of your credit report by requesting in writing. Simply fill out the request application for each agency and mail it in. This free report will have all the information regarding your credit history… what cards you have, what student loans etc., and how you have repaid those loans.  To obtain your credit score, you will have to pay about $30 to each agency. When you order this, your updated report comes with it.

Be careful of one thing should you order your report and score: be sure to order the one time report. Both companies have an option whereby you pay a monthly fee of about $15 per month to have constant access to your file and score. There is absolutely no need for this. Ordering your report and score once a year from each company will suffice, and will only cost about $60.

I’m in the habit of ordering a free credit report in June, and ordering a full report and score in December. It allows me to check for any incorrect information that may be affecting me, and it also allows me to track my credit history.

While ordering or inquiring into your own file doesn’t affect your score, having many lenders looking at your score will lower it. By having a recent copy of your report and score printed out, you can bring that to lenders to talk about ball park numbers without affecting your score, and then have them check your official report once negotiations start to solidify.

An excellent place to start if you are new to credit reports and scores is this Government of Canada website. It is also in my sidebar under resources (Understanding Your Credit Report) should you need it in the future.

Cash Back Cards and Contributions

Following from yesterday’s post, it seems to me that if you’re disciplined, you might be able to achieve the same effect even if you don’t have an RBC or National Bank of Canada point collecting card.

While those two banks have an option to redeem your points for RRSP, TFSA, or RESP contributions, or to pay down debt, the other four main banks all have cards that credit your account in amounts ranging from 0.25% – 2% of the amount charged to your card over the year.

If you had the no fee BMO 0.5% cash back card, for example, and charged $10,000 over the year, your card would be credited $50.  If you had the no fee Scotia 1% card and spent the same $10,000, you would be credited $81.25 (0.25% on the first $1500, 0.5% on the second $1500 and 1% on amounts over $3000)

It is important to take any yearly fees into consideration. BMO also has a 1% cash back card, but it has a yearly fee of $49.

If you have a cash back card, you could make an extra cash contribution to your TFSA, RRSP etc. and then use the amount credited to your card for purchases you would otherwise have used cash for.

This would have the same effect as the bank is still essentially paying for your contribution. You just need to do a little footwork.