Ask the Experts: May 2018
Talking about money and asking questions about finances is something that a lot of people are uncomfortable with. In general, people tend to shy away from topics about spending and saving. However, this usually isn’t a good idea. When you don’t talk about money, there’s a much great likelihood of confusion. Not talking is how misinformation spreads. When you talk about money and ask questions, you learn more about money. This helps you make stronger financial decisions, manage your money better, and create a better plan for your future.
This is why our team of financial experts regularly answers questions about money, budgeting, finances, and more. We want to help spread accurate and helpful information and assist people with living stronger financial lives.
The questions listed here have been condensed or rewritten for clarity and simplicity.
How much should I be spending each month on housing costs?
In general, about 30% of your pre-tax income should go towards housing costs. However, many Canadians are spending much more. A report by RateHub.ca found that Canadians are spending an average of 45.9% of their pre-tax income on mortgage payments, utilities, property taxes, and other homeownership costs. However, people in Vancouver are spending an average of 79.7% and those in the Greater Toronto Area are spending 72% of their incomes on housing.
If you live in an area where spending 30% of your pre-tax income isn’t enough to afford your housing costs, you’ll have to cut costs elsewhere to make it work.
Spending more than you can afford on housing costs can put you at risk of going into serious debt. This is because housing costs generally don’t change much from month-to-month. Once you’re paying rent or mortgage payments, these costs don’t usually go down unless you move. That means, if you’re paying a lot in housing costs, you’ll need to be very disciplined with your spending in other areas to make sure you don’t go over budget. Otherwise, you’ll have no choice but to take out a loan or place purchases on your credit card so that you can pay for you other monthly needs.
It’s important that you try to keep housing costs to a reasonable level, especially since interest rates may rise in the future, which would increase your costs.
I have a lot of credit cards and department store cards. Should I cancel some of them? I don’t want to hurt my credit rating.
There is no “perfect number” of credit cards to have. However, if you have a lot of cards, and some of them are paid off completely, it could make sense to close some. When you close a credit card, you eliminate the temptation to use it. You can’t charge purchases to a card that is closed, so closing some of your credit cards can be a good way to curb your spending and borrowing. If you’re the type of person who gets tempted and who tends to put more on your credit cards than you can afford, it might be beneficial to keep one or two and to close the rest.
Having a credit card active also increases the risk of identity theft, so might not want to have a lot of cards sitting around, even if you’re not using them or not tempted to use them.
However, cancelling a credit card can cause issues with your credit score, as you noted.
There are two ways that cancelling a credit card can hurt your credit score. One is if you cancel your oldest card. This is because doing so will affect the length of your credit history. This won’t influence your rating right away, since the credit bureaus look at the last seven years of your history, but it could hurt your credit rating down the line.
Another way that cancelling a credit card could hurt your credit rating is because it could affect your credit utilization. Credit bureaus like to see people using less than 35% of their available credit. Cancelling a card can increase your utilization percentage. For example, if you have three credit cards with a total credit limit of $10,000, and you have a balance of $3000 on one card, you’re using 30% of your available credit. However, if you cancel one card that has a $5000 limit, that $3000 will then equal 60% of your available $5000 credit. Using this much of your available credit could hurt your credit score. The best way to avoid having this happen is to pay down more of your balance before you cancel a card.