We sat down with mindful money teacher, Chantal Chapman along with fintech company MOGO to get a few millennial friendly tips for ensuring we’re ready when the homebuying time arises. As charming and relatable as she is knowledgeable, Chantel has tackled shopping addiction, debt and financial guilt to come out on top, making her uniquely equipped to help young people navigate the challenges of financial illiteracy, debt management and the dreaded mortgage pre-approval process. Here are 5 things you can do at any age to make better decisions with your hard earned money.
1. Figure Out Why You Buy
After consulting with clients for years, Chantel realized that understanding financial basics wasn’t always helping her clients achieve their goals. Instead, an understanding of the reason they were making mindless purchases was necessary. Seeing how crucial this was to her client’s financial success, she began consulting with a leading neuroscientist to help her get to the bottom of bad spending habits. While not all of us have access to a neuroscientist, we can think back on our upbringing, our habits and our relationship with money and material items to help us get to the bottom of why we want to buy something. It’s not an easy thing to do when there is so much temptation to make purchases, but it may bring some perspective to help change your mind and funnel that extra cash into your down payment savings plan on a new home.
Chantal’s top tip for combating mindless spending? Ask yourself if each purchase is hedonic spending (purchasing because you feel sad, tired, bored etc.) Or eudaimonic spending (purchasing as a way to contribute to or maintain your true state of wellbeing). Be careful here, not every purchase is straightforward and many can be either or; it all depends on your reason for buying.
2. Check Your Credit Score, But Remember It Does Not Define You
Before you begin looking for a home or mortgage, check your credit score. MOGO’s app is just one of many out there that will let you do this for free without any harm to your score.
Just as important as checking is understanding what your credit score is: 35% is your payment history, 30% is utilization ratio, 15% is length of credit history, 10% is types of credit and 10% is inquiries. As Chantel tells us, when she was moving into her Toronto abode, her landlord, internet and utilities companies’ checks on her credit made it drop 10 points! What can you do in that situation? Nothing! You can’t avoid living to maintain your credit score and Chantal encourages letting go of the guilt she often sees associated with credit scores. “Your credit score does not define you and the only time it matters is when you’re buying something!”
3. Master Your Utilization Ratio
Your utilization ratio refers to the amount of Unsecured Debt (credit cards, line of credits, etc.) you’re currently using. Try to keep your balance below 35% of your overall (and individual) credit limit and never go above 70%, even if you pay it off monthly.
Ex: If you have a line of credit and credit card of $1,000 each, it’s better to keep each at $300, under the optimal 35% utilization than to have one at $500 and one at $100. If you pay your credit off in full monthly but are exceeding the 70% utilization ratio, it is wise to increase your limit – just be sure to trust yourself enough to not increase spending as a result.
For those struggling with debt payment, Chantal recommends beginning by paying off all your unsecure credit options to 70%, then to 35% and finally to debt-free. These smaller, more manageable goals will allow you to build positive payment habits without feeling overwhelmed. As an added bonus your credit score will self-correct within a few months once you achieve the 70 and 35% milestones.
4. Do A Subscription Audit
If the idea of doing a spending audit sounds so daunting you keep putting it off, start small. Use a financial tracking app like Mint to pull your reoccurring charges, like Netflix, Amazon Prime etc. Chantel’s handy sheets will help you track and see how much your forgotten subscriptions are really costing you. You can then dig deep to see what you could cancel and save money on. Once you tackle that (and see how easy it can be) you can move onto a different category, like your monthly coffee spending.
5. Netflix And Chill Your Credit Cards
Don’t trust yourself with credit cards? Instead of cancelling your card, which can eliminate years of valuable data to your credit score (remember 15% of your score is based on credit history), set up a monthly subscription to be billed to that card, then set up an automatic payment a few days before the due date. Put your cards in a Tupper Wear with water and put them in the freezer. You will continue to drum up positive payment behavior for your credit score without being able to reach for your credit card for mindless spending.
Chantal’s Pro-Tips For Mastering The Mortgage Approval Process:
When you are ready to start looking for a mortgage, don’t do it casually. Although getting mortgage approvals will be a hit on your credit score, doing multiple checks with different vendors (which Chantal recommends) will count as one hit as long as it’s done in a 3-month period.
You can’t get a mortgage if you have any outstanding collections (sometimes even small charges like parking tickets can go into collections if left unpaid). Check your collection history and pay those off before beginning your search.
Make sure you fall within the 222 rule, which most mortgage lenders will follow: 2 years of credit history, 2 forms of credit reporting (like a line of credit of credit card) and a total combined credit limit of $2,000.