This & That: Practical Solutions Edition

M & D Wrote: 7 years ago my husband & I were newlyweds with about $65,000 in debt. The majority of it being student loans. We decided to consolidate our debts into 1 monthly payment. On this orderly payment of debt program we were not allowed to have credit cards or loans of any kind. It changed our credit score dramatically to the point that the banks, electricity bill companies & even cell phone providers saw us as being in bankruptcy. Today we sent in our very last payment!! Our question is what is the best way to rebuild our credit now that we’re debt free? We haven’t had credit cards in 7 years & have gotten used to & enjoy paying all in cash. However, now we’re at a point where we would like to buy our first home. Any suggestions would be helpful.

Gail Says: A credit card is a great way to build your credit history. You use it (instead of cash or debit) and pay it off in full to demonstrate your ability to manage credit. Over time your credit history gets stronger. Another good way to rebuild a credit history is to use a loan for an RSP contribution. Let’s say you decided to save $2400 to make an RSP contribution, you would go to the bank and ask for a loan for that $2,400 and then use your cash saved to pay off the loan after about 90 days. For about $50 in interest you’d be “buying” a credit history. A couple of different sources of credit are needed to re-build your credit history/score.

 

A Wrote: My fiancé and I will be getting married next spring, and we’re working on how best to manage our finances as a married couple. One sticking point has come up, and I’d like your advice. I have had a credit card for many years, and have used it regularly but always pay off the full balance every month. This has resulted in an excellent credit score which I’m quite proud of. My fiancé has been advised to use his credit card and always carry a balance month to month, never fully paying it off, in order to improve his credit score. What concerns me is that he was given this advice by a financial advisor associated with the bank at which his credit card is held. Which is the way to go in building credit? Is carrying a balance beneficial to the process?

Gail Says: One should never do something dumb to get a result. Carrying a balance means you’re paying interest (dumb). Yes, it may give you more credit score points but it is still dumb. And it was self-serving of the banker to suggest this to your mate. The difference (if you’re doing everything else right) is negligible. Please, pay off the credit card and stop helping the bank by hurting yourself.

 

J Wrote: We both have RRSP contributions that are matched by our work but we just put them in medium risk. (Not knowing where to put them this was recommended.) We get our statements and watch it grow but not sure if we are putting enough away for retirement. We have 2 girls (5 and 11) and we put money into a RESP every month as well. We have a savings account for emergencies, vacations, etc.

Do you recommend using a financial planner? How do we know how much to save and they best way to get a good return on our investment. We have not opened TFSA yet. I don’t really understand how they work. Can you help us as we are not in debt but need help planning for the future?

Gail Says: Okay, so you’re saving but you’re not sure you’re saving enough or how to make those savings work as hard for you as you want them to. I’m going to suggest you go get a copy of “Never Too Late,” which is my book on this topic. It should be at your library. While you’re there pick up a copy of “Saving for School” which will explain the ins and outs of RESP’s in detail.

How much you need to save depends on a) how much you’ve already saved, b) how much you want to have, c) your rate of return. Typically we say things like “save 10%.” The end game should be to have about 11x your income socked away by the time you’re in your 60s. I go over all of this in great detail in the book.

 

C Wrote: If we buy a home for $200,000, we have $110,000 saved, $67,000 of that money is in RRSP’s. We are first time home owners. What is the best route to go, as I’m not sure what to do?

Gail Says: Under the RSP Home Buyers’ Plan you can each withdraw up to $25,000 from your RRSP, and that amount must be repaid (interest free) over 15 years or the money not repaid is included in your income in the year it should have gone back into the plan. So that’s $50K. You have another $43K saved, giving you $93,000 to work with. You should set aside money for the closing costs (land transfer tax, legal fees, pre-paid property taxes, etc.) and for whatever you think you may have to buy (window coverings, appliances) when you first move in. If you put $40,000 down on the house that’s 20% and will take you out of mortgage insurance (CMHC) territory. If it were my money I’d put the $50K from the RRSPs down, pay the closing costs out of the $43K and keep the rest as an emergency fund.

 

G Wrote: Regarding withdrawals from a RRSP. The amount of tax withheld is based on the amount withdrawn. Up to $5,000. 10%, $5,001 – $15,000. 20% Over $15,000, 30%. Some authors and some financial advisers say to save tax you have to do the following, cash $5,000 this week you pay only 10% after two weeks cash another $5,000 you pay 10% within the same year instead of cashing at once $10,000 you pay 20%. This is not true. I did that procedure and the bank told me for the second withdrawal I would be charged 20% tax not 10%. I wonder where this information is researched because it was incorrect?

Gail Says: Each withdrawal of $5k or less should have withholding tax of only 10% withheld, but perhaps different banks have different timeframes for resetting the withdrawal limit: since you made 2 within the same month they treated it as one. The important thing to note is that the withholding tax may not be all the tax you will owe. That will be determined by your income for the year so be careful about not having enough set aside to pay the taxes that will come due.

 

P Wrote: My husband and I have a differing view about liquidity of funds. We have no outstanding debts aside from $2-300 on a single, joint credit card. My husband has been aggressively putting funds into our savings accounts in order to pay off our final student debts (which he did earlier than we had planned, and wiped out a bunch of savings in doing so, against my wishes). We have continued to put away large sums every week into our savings to replace what was spent and to build up a down payment. However, this is at the cost of our main joint checking account – we used to keep a balance of $3500 after the rent, and today, before the rent, it’s at $1500. Every time I say I’m uncomfortable with the lack of liquidity we have (any transfers from savings to checking have a 24 hour mandatory delay), he argues that we have the same total balance among the accounts, and if a big emergency comes up, we will have time to move the funds to make payment, as our debit cards only allow a $500 withdrawal per card anyways. What is your opinion on the level of liquid funds a household (apartment, no kids, 1 car) should have access to on am immediate basis?

Gail Says: This is a purely personal matter, but I’m concerned that your mate isn’t really taking your needs into account before doing things. From a strictly black and white point of view, if you’re earning 1.3% on your money, and you moved $2,000 to your checking account, you’d be losing out on $26 a year in interest. Is your peace of mind worth $26. A couple of other things:

You know you can increase the debit card limit, right?

You should NOT have a joint CC. You should each have your own credit card so that you are both building a credit history. In all likelihood, the credit history on the joint card is only being reported on one person’s name so someone isn’t building a credit history.

 

S Wrote: If I do not find employment fast should I withdrawal from my RRSP since I would be in the lowest tax bracket if I have the EI for the full 46 weeks? I usually make $52K gross. My RRSP is approx $467,000. Or am I ruining my retirement by doing this. I was thinking of a withdrawal between $5-$8k. Can you please send me advice? Love all your shows and advice you give – super woman.

Gail Says: Yes, if you’re going to be in the lowest tax bracket, taking money from your RSP shouldn’t be too much of a problem. Just know that you’ll end up paying more than the 10-15% the bank will withhold, so be prepared to set aside money to cover the rest of the taxes you will owe, k?