Credit is often a misudnerstood concept and leads people to make very poor decisions for their long-term financial wellbeing. David Moffatt, our Senior Debt Relief Specialist, dives into the reasons for this in Episode 4 of the Escaping Debt Podcast.
David Moffatt (00:01):
Hello everybody, I hope you’re doing exceptionally well. Welcome to episode four of The Escaping Debt Podcast. Today we’re going to be talking about why your credit and the impact of credit really shouldn’t matter when you look at restructuring debt. My name is David Moffatt, and I’m going to be the host today. I’m the Senior Debt Relief Specialist and Local Director of 4 Pillars Halifax.
Debt can be a symptom of any number of problems and life circumstances. However, it is important to understand that YOU ARE NOT YOUR DEBT.
At 4 Pillars Halifax, we'd love to discuss how we can help you become debt free.
David Moffatt (00:21):
Remember, our goal is that no consumer should have to struggle with the overwhelming burden of debt, and we also believe that it’s simply not possible for a company to represent both the consumer and the debtor at the same time in an unbiased fashion, because of this, we work for you, not your creditors.
David Moffatt (00:38):
So today’s topic is going to be a really interesting one. I hear it all the time, people come into the office, swarmed with debt, they can barely pay their bills if at all, and they’re concerned that their credit is going to get impacted. This is something that I understand why it occurs. Think about it, everything in society right now is credit based.
David Moffatt (01:04):
If you want to go buy a couch, you can finance it. If you want to buy a car, you can finance it. You buy a house, you finance it. You want to get a cell phone, you need a credit check. You want to get an apartment, you get a credit check. And so credit has become an integral part of our life, and it’s clear to see why people are so concerned about the possibility that their credit would end up getting impacted.
David Moffatt (01:30):
But it’s a little bit more complicated than that. And the main reason for this is somebody that’s already struggling to pay their bills, unbeknownst to them, their credit is actually already impacted. Now, their credit score might not be impacted, but credit score is really only one of three components of someone’s credit profile.
David Moffatt (01:56):
So what actually makes up someone’s credit profile? So first of all, there’s your actual credit score itself, there’s the credit products that you have, and then most importantly, there is your financial status. I guess, your financial foundation. So what does your asset base look like? What does your savings account look like? Are you making your payments on time? And I don’t necessarily mean again, from a credit perspective, I mean from a money management perspective.
David Moffatt (02:28):
Most people are simply unaware of this. And does your money management skills impact your credit score? Yes, to a certain degree. Can you be very bad with your money management principles and still have a good credit score? Of course. However, if you’re not good at money management, your score will only last so long. So for example, you can build a credit score very, very quickly. You go out and acquire a bunch of new products and you make sure they’re paid off every single month and your credit score will increase. Now, obviously that’s a very general statement, but that is how it works, okay.
David Moffatt (03:11):
The problem is, is if you can’t actually afford to pay off those credit products each and every month and say the case of a line of credit or a credit card, well then slowly but surely your credit will start getting impacted and then you’ll be right back to where you started.
David Moffatt (03:27):
This is why when somebody is struggling with debt, getting another loan to pay off that debt is typically not a good idea without proper professional consultation, because it can simply just further add to the stress that that individual is feeling. So let’s talk about why it really doesn’t matter if your credit gets impacted when you restructured that. So first of all, what is restructuring, right? So restructuring is essentially looking at every single option to deal with debt, ranging from budgeting all the way to bankruptcy and everything in between.
David Moffatt (04:08):
What most people know of as debt restructuring from an invasive perspective that would impact credit are the more invasive options. So these would be credit counselling and formal settlements; consumer proposals and bankruptcies. Now of course these don’t come without consequences and the consequences that your credit ends up getting impacted. And this is the big concern for a lot of people.
David Moffatt (04:30):
They try budgeting themselves out of the situation. They look at assets that they can sell. They try to get help from friends and family. They might go take out a couple extra loans to see if they’re able to dig themselves out of this, but none of that works. And so what we’ve seen is that the average client of ours spent 18 months on average before seeking professional advice to deal with their debt, trying to solve their situation themselves.
David Moffatt (04:56):
Now, that’s a year and a half and that’s from the moment they realized they had a problem, and so you can imagine that most likely the average consumer probably struggled for several years before reaching out for help. Well, actually all of the invasive options have a consequence which is impacting credit. The alternative to not doing these options, in my opinion, is far worse than doing nothing at all.
David Moffatt (05:33):
Imagine if you’re struggling, you can barely pay your bills as it is, or you’re living paycheck to paycheck, how do you actually get ahead in life? It’s next to impossible. You’re probably already … You’re basically probably already having issues paying your regular day to day bills, trying to find money to buy groceries because of all of the debt payments and the bill payments you have. You might be trying to keep your credit up at a high level relatively. Yeah, you just can’t seem to do it because of how much you’re spending on debt payments.
David Moffatt (06:12):
I’ve mentioned this in other episodes, but what’s the point of going to work to come home to pay bills and the credit card and the debt payments to then just simply repeat it over and over again. The goal is to actually advance in life. So for example, a lot of people have aspirations of buying a house. Now, let’s consider a couple of scenarios.
David Moffatt (06:39):
So the first scenario is somebody who’s drowning in debt, is living paycheck to paycheck but has a great credit score. Well, they would go to the bank and the bank would run their debt service ratios, which is the ratio that tells the bank how much free cash you have essentially to be able to afford a mortgage, and because of their debt, they wouldn’t be able to buy a house.
David Moffatt (07:02):
This is true even if they had an 800 beacon score, a very, very good credit score, just simply by the nature of their debt, they wouldn’t qualify. In this instance, if they were to restructure rather and now looking at the second scenario of an individual who had recently restructured is now say, has the ability to save $500 a month yet has impacted credit for a maximum of six years. Well, at the end of that six year period, they would end up having $36,000 saved.
David Moffatt (07:38):
So now you have to consider this, right? In the first one, they couldn’t even save for a down payment even if they want it to. Whereas now in the very least, they’re able to save for the down payment, rebuild credit along the way and by the time they’ve completed their program, there’s a very, very high likelihood that they’re going to be able to get into a house plus or minus a year or two.
David Moffatt (08:02):
Now, they wouldn’t have been able to do that in the other scenario. There would have been two cases that would have occurred. They would have either kept going, hopefully increase their income or decrease their expenses. They would have been able to pay the debt off slowly over time, and let’s pretend that they were even able to do it in five years or less.
David Moffatt (08:23):
Well, let’s just go with five years. So let’s say they were able to pay off their debt in five years, well, they don’t have a down payment. So if they wanted to buy a house with even a 5% down payment, and let’s assume that the house they want to buy is $200,000, they would need $10,000 saved, which means that even if they were able to save $750 a month, that’s still going to take them about a year. So you’re right at that six year window anyway.
David Moffatt (08:54):
And by the way, you continue to basically live paycheck to paycheck for that entire five year period. It doesn’t take into account that anything that can go wrong and often does go wrong in life. So I always have to go back to the point that in almost every instance it makes sense to restructure.
David Moffatt (09:19):
It really bothers me when I have people come into the office that came and saw me a year or a year and a half prior, and at that moment in time, the plan that they could have implemented would have been life changing, yet they chose not to do it because they didn’t like the credit impacts, which by the way, is probably my fault simply because I wasn’t able to properly portray the benefits of actually dealing with their debt.
David Moffatt (09:52):
If they come back a year or a year and a half later, and then they come to me and they say, “Listen Dave, I really appreciate the time you spent with me before. I didn’t want to impact my credit, but now I have no choice.” So now you consider all of these people, because I bet you the amount of people that need to restructure that don’t because of credit, I bet you the overwhelming majority of them aren’t the individuals that end up increasing their income, decreasing their expenses and getting out of their situations.
David Moffatt (10:18):
I would assume that a lot of them are in a position where they basically, I don’t want to say did nothing, that’s very probably naive of me. They probably struggled through it, tried absolutely everything they could to deal with their debt and then had to restructure but just didn’t come back to me.
David Moffatt (10:42):
I just want people to do what’s right for them. So long story short, if you’re struggling financially and you’re concerned about your credit and you don’t want to impact your credit, but you’re living paycheck to paycheck, it almost always makes sense to restructure. Don’t continue struggling.
David Moffatt (11:04):
So everybody, thank you very, very much for listening to the podcast. This is episode four of The Escaping Debt Podcast. Thank you very much for listening. Remember that our goal is that no one should have to struggle with the overwhelming burden that debt causes, and we believe that it is not possible for a company to represent both the consumer and the creditor in an unbiased fashion at the same time. That’s why we work for you, not your creditors. Thank you very much.