Category Archives: credit management

Credit ratings 101: Four factors that determine your creditworthiness

Most Canadians know their credit rating is a number, somewhere between 300 and 900, that generally reflects your credit-worthiness and is used to secure approval from lenders. But the fact is, nobody outside of the ratings agencies knows exactly how they work.

Canada’s two credit rating agencies — Equifax and TransUnion — do not publicly reveal the exact formula used to calculate your score in order to keep people from gaming the system. However, there are some basic indicators you can use to improve your standing.

Personal finance coach David Lester joined CTV’s Your Morning on Thursday, to clear up some misconceptions and outline some simple steps you can take to increase your score.

Credit ratings, he explains, are broadly determined by five weighted factors:

  • Payment history (35 per cent)
  • Amount owed (30 per cent)
  • Length of history (15 per cent)
  • New credit (10 per cent)
  • Types of credit used (10 per cent)

Here are four things Lester said you need to know about how to improve your credit rating:

Having a zero balance on your credit card can have a negative impact

Lending money is a business, and financial institutions want to make sure they make money by charging interest.

“If you pay off your debt all the time, and you don’t pay any interest, that actually hurts your credit rating because they want to know that you are going to pay a little bit of interest,” Lester said.

He said it is important to remember that a credit score is a measure of how much lenders want your business. They are designed with banks in mind, not you. While that zero balance may help you sleep at night, avoiding as much interest as possible does not necessarily win you any favours.

Keep your first credit card

Remember that credit card you signed up for in your first year of university while wandering around campus on frosh week? It’s probably the genesis of your credit managing history, so keep it active to show lenders you have been responsibly managing debt since your college days.

“They (lenders) like that you’ve been borrowing money and paying it back for a long time,” Lester said.

Credit diversity is a good thing

So you have a car loan, outstanding student debt, a mortgage, and a few charges on your credit card. How will this impact your credit score? The answer depends on how well you are managing all those debt obligations. But, broadly speaking, diversity is good.

“They like a plethora of types of loans. If you have all of those under control, and you are doing well on all of them, then it will affect your score (positively),” Lester said.

Do your homework, because credit ratings are prone to errors

Don’t be surprised if you pull your credit report and discover an error. Lester estimates about 30 per cent contain mistakes, some of which could saddle you with a higher interest rate or see you denied credit all together.

If you find something wrong, flag it with the credit agency as soon as possible and stay on top of your records on an annual basis.

“It’s really important to do that every year. Just go through and make sure there aren’t any little mistakes on your credit rating,” Lester said. “You want to make sure that you clear those up, and it will boost your rate.”

 

Source: Jeff LagerquistCTVNews.ca 

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Good debt, bad debt and good bad debt

There has been an awful lot of noise in the media recently about the increasingly high levels of debt the average Canadian is carrying around on his or her back. And rightfully so: According to a recent report from Statistics Canada, our total national debt load, including mortgages, sits at around $1.8 trillion. (Why does that number always make me think of Mike Myers?). That’s more than $50,000 for every Canuck. But amid all the commotion are some surprisingly difficult-to-answer questions: Is all this debt bad? Is any of it good? And how can we determine what debt is good, what debt is bad or should we just try to avoid all debt like the plague? The answers aren’t always clear-cut. Clearly, further insight is required.

Economic types traditionally describe debt as being either good or bad, depending on what it’s used for. The good stuff is generally defined as money borrowed to buy something that will appreciate in value, like a house. Conversely, bad debt is described as money borrowed to buy something that will depreciate in value, like Buddy using his credit card to borrow $2,000 for a new set of golf clubs (they’re on sale!), because everyone knows you’ll play like Tiger Woods once you have a $2,000 set of his Nike golf clubs.

Unfortunately it’s not that simple. Not all good debt is good and not all bad debt is bad. (Warning: This is going to get wordy.) Yes, I am saying that there is such a thing as bad good debt and good bad debt. An example of bad good debt is when Buddy goes out and buys an oversized house that exceeds his needs. And to make matters worse, Buddy buys the house before he is financially ready. He puts down a too small down payment on his too big house and as a result, he ends up with a too big mortgage—which he amortizes over too many years. Given enough time, the house will likely appreciate, and this technically makes Buddy’s big mortgage “good” debt. However, it’s unlikely the house’s value will increase enough to cover the cost of the interest he’ll end up paying, let alone the larger expenses the house is going to generate: heating, upkeep, taxes and so on. To boot, there is a real possibility that this “good” debt will interfere with Buddy’s ability to properly save for his future. Broadly speaking, if Buddy’s housing costs (mortgage, utilities, insurance and taxes) exceeds 32% of his gross income, and if he will be paying those costs for more than 25 years, then it’s bad good debt.

On the other side, when Buddy’s sister Buddy-Lou takes out a two-year loan to help her pay for a gently used Honda Civic, that loan is technically bad debt since the car is going to depreciate. However, borrowing this money makes more sense than borrowing for a new car and it certainly makes more sense than leasing a new vehicle. (We’ll save that discussion for another time.) Assuming she takes care of it, Buddy-Lou’s car will still have value for years after the loan is paid off. Sure, it would be nice if she had the money in her bank account to buy that Civic when her old car died, but it would also be nice if George R. R. Martin didn’t kill off all of the best characters in Game of Thrones. Life happens. The loan needs to be manageable, without putting pressure on Buddy-Lou’s ability to save for her future. If that’s the case, it’s good bad debt.

It’s important to understand there is a big difference between accepting that you likely will incur some debt as you go through life and accepting debt as a way of life. It’s also a good idea to occasionally remind ourselves that even good good debt, like a properly structured mortgage is debt nonetheless and, as such, the interest you are paying on it isn’t doing you any favours. All debt, good, bad or anything in between, costs money and we should always be on the lookout for ways to pay it off as quickly as reasonably possible.

As a nation, we have become far too comfortable with personal debt. Today’s low interest rates are certainly a contributing factor, but the “keeping up with the Joneses” syndrome plays a part too. In some circles, it has become acceptable, even fashionable, to rack up mountains of high-interest credit card debt and then borrow more money to make the payments. Do not buy into this thinking. Pun intended. Credit card interest rates are anything but low, with many cards charging up to 29.99% interest. Even a “low interest” credit card will charge you around 12%. If you’re carrying a balance on your cards and you’re struggling to pay it down, you should transfer the balance to a low interest line of credit while you work it off. That would at least be better bad debt.

There is an inherent danger in describing debt as good. Sure, some types of debt are obviously better than others but that’s not the same thing as being good. Maybe we should further refine the two traditional definitions of debt into “bad debt” and “responsible-debt-that-I-thought-about-carefully-before-I-took-on-but-I-still-need-to-eliminate-as-quickly-as-reasonably-possible debt.” Because really, the only good debt is no debt at all.

Source: Money Sense – Robert R. Brown is a personal finance speaker and the author of Wealthing Like Rabbits. Follow him on Twitter @wealthingrabbit

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Why your credit score matters

And how to improve it

Despite holding multiple credit products (like credit cards or lines of credit) many Canadians don’t understand how debt and their behaviour around it affects their credit score in the eyes of the credit bureau—or why it’s important; on top of that, 47% of Canadians don’t know where to check their credit score.

Your credit score is a three-digit number, between 300 and 900, that measures your creditworthiness. The higher your score the better, as it’s used by lenders and financial institutions to determine whether your credit-worthy or not. In general, a low score could mean you’re declined on a loan or receive a higher interest rate, while a higher score allows for lower interest rates and better options when it comes to things like getting a mortgage and borrowing money. Your credit score number essentially indicates how likely your are to repay money you borrow, based on how you’ve handled past financial obligations.

How is your credit score determined?

Most lenders want to see two forms of active credit for at least two years. The longer the history reporting, the better.

Your credit score is made up of the following:

  • 35% payment history. It’s important to make your payments on time. Missing a $4 dollar payment on a credit card could be as bad a missing a $400 payment, so don’t skip the minimum payment. This also includes collections. Some creditors (even city parking ticket collectors) may report that you haven’t paid them to your credit bureau, or even use a third-party collection agency to get their money back. These collections on your credit bureau can lower your score.
  • 30% utilization ratio. This is your level of indebtedness, or how much of your total available credit you’re using.
  • 15% length of credit. The longer you have an account open, the better. It shows you’re capable of managing credit responsibly.
  • 10% types of credit. It’s good to have a mix of different types of credit (revolving credit like credit cards and lines of credit are riskier than personal loans so it’s better to have fewer of those in your mix) to show that you can handle your payments.
  • 10% inquiries. These happen every time you agree to a “hard credit check”. Hard checks usually happen even when opening a chequing account with a bank or a new phone plan.

3 things that can help improve your score:

1. Practice good utilization ratio habits

A relatively fast way to improve your credit score is to start practicing good utilization ratio habits. Once you start doing this, it could improve in as little as 30-60 days. If your credit card limit is $1,000 and your balance is $1,000, your utilization ratio is 100 per cent — and this not good in the eyes of the credit bureau. Credit bureaus base credit scores on behaviour with credit. If you’re constantly maxing out your credit cards, it could imply that you’re not far away from defaulting on your minimum payments. It looks like your income is stretched. Set an imaginary limit of 70 per cent and don’t go over that. Doing this will keep your credit score healthy. For example, if your credit card limit is $10,000, don’t borrow over $7,000.

2. Think twice about closing an unused credit card

It may seem like a good idea to close a credit card that you’re not using, or have paid off and are trying not to use. But, closing a card, or leaving it inactive can negatively affect your credit score. This goes back to the length of credit factor that the credit bureau reports on which makes up 15% of your credit score. Rather than closing the card, consider using it for a monthly subscription, like Netflix or Spotify, and set up an automatic monthly payment from your bank account to ensure it’s covered. This trick will also improve your utilization ratio and payment history, since you’ll be staying far under your limit, and making on-time payments.

3. Consolidate credit card debt

Credit cards are considered revolving debt; meaning when you pay them down you can keep borrowing against them. This type of debt is psychologically proven to keep people in debt. Many revolving credit products allow you to pay back only the interest, which is a major reason why so many people find themselves stuck in what feels like an endless cycle of debt. If you’re like 46% of Canadians* and you carry a credit card balance every month, you could benefit from a personal instalment loan to help get out of the revolving debt cycle. Unlike credit card debt, an installment loan has a specific term and requires you to pay back interest and principal in every payment, which means you have a set deadline for paying it off and getting out of debt.

The first step in improving your credit score is knowing it. Mogo offers Canada’s only free credit score with free monthly monitoring. Check your score at mogo.ca.

Source: Special to Financial Post | May 6, 2017 |

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Pros and Cons of Joint Credit Cards

CoupleUsingCreditCard_ImageSource_DigitalVision.jpg

When two people have a joint credit card account, both people can make charges to the credit card and the card’s history is included on both people’s credit report. Both people are also liable for the credit card payments. When the payments become delinquent, the credit card issuer can go after either cardholder for payment.

If you’re thinking about getting a joint credit card with a partner, spouse, or child, knowing the pros and cons will help you decide whether it’s a good idea.

Advantages of Joint Credit Cards

You share a bill. When you and the other person, your spouse for example, have one rent, one electricity bill, one cell phone bill, it seems only natural to share a credit card bill. Having one less bill to pay can let you make the most of your income. Plus, when it’s time to pay off your debt, you’ll have an easier time deciding which card to pay back first.

Help one person get better credit. Adding a spouse or family member with bad credit to your credit card can help them get better credit. But it will only work if the credit card is managed right – the bill is paid on time and the balance is kept low.

Help one person get a credit card/good interest rate where they otherwise wouldn’t. Being added as a joint user might be the only way to get your spouse a credit card, or to get her a low interest rate.

Disadvantages of Having a Joint Credit Card

Both people are legally responsible for making the payments. That means the credit card issuer can take legal action against you for charges you might not have made.

You could even be sued and have your wages garnished.

Credit card disagreements could cause relationship problems. In a 2008 poll conducted for CreditCards.com, 19% of respondents who shared a credit card said they had arguements with the other person about the account. Seven percent said they’d cancelled a shared credit card because it caused relationship problems.

Breakups or divorce make it hard to manage the credit card. No matter what a divorce decree says, the credit card issuer holds you to the original credit card agreement. So if your ex-spouse isn’t paying his or her share of the credit card bills, your credit can stil be affected. It’s even harder to manage the credit card bill if you sever ties with someone you were dating or even a friend or family member.

One person could use the credit card to hurt the other. It sounds childish, but it happens, often after a breakup. One cardholder could go on a revenge spending splurge, leaving the other cardholder with the bill. If the revenge-seeker already has bad credit, she (or he) has nothing to lose from a maxed out credit card or a few more late payments.

Should You Share a Credit Card?

It’s wiser to keep separate credit cards. Before you make the decision to get a joint credit card, evaluate your reasons for sharing a credit card. In the CreditCards.com survey, only 9% of respondents said they felt closer to the person after sharing a credit card.

Similarly, 9% said they felt more in control of the relationship.

Discuss the pros and cons of having a joint credit card. Make sure both people understand the effect a breakup could have on your credit history.

Source: TheBalance.com – Updated September 10, 2016

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Nearly half of homeowners unprepared for job loss or other emergency

The poll released today by Manulife Bank finds that 24 per cent of those surveyed don’t know how much is in their emergency fund, 14 per cent have not put away any funds and nine per cent have access to $1,000 or less. (GETTY IMAGES)

An emergency fund is meant to be there in times of need, but a new survey suggests nearly half of Canadian homeowners would be ill prepared for a personal financial dilemma such as job loss.

The poll released Thursday by Manulife Bank found that 24 per cent of those surveyed don’t know how much is in their emergency fund, 14 per cent admit to not putting away any funds and nine per cent only have access to $1,000 or less.

The remainder of those surveyed have up to $10,000 saved, with the average amount being $5,000.

Manulife Bank chief executive Rick Lunny says not having three to six months of expenses set aside can lead to desperation if a situation arises where you need to access money right away.

“The risk here is when they don’t have that money, and an unexpected event happens like you need a new furnace or a car repair, many of these people don’t have a choice but to lean on high interest cards,” he said.

Lunny noted that instead of taking advantage of the current low-interest rate environment to save money, the poll suggests that many homeowners are using it to buy more expensive homes.

“They’ve taken on large mortgages and as a result of that, they’re stretched in many ways,” he said. “Because of that, maybe they haven’t had the financial discipline to put aside rainy day money.”

Manulife says among those polled, homeowners had an average of $174,000 in mortgage debt, with an average of 28 per cent of their net income going toward paying off their home each month.

About half (46 per cent) of those polled say they would have difficulty making their monthly mortgage payments in six months or less if their household’s primary income earner lost his or her job.

Sixteen per cent say they would have financial difficulty if interest rates cause their mortgage payments to increase.

Mortgage data has been a hot-button topic in recent months as the federal government takes steps toward reducing the risks in the Canadian housing market, particularly in major cities like Toronto and Vancouver.

Earlier this month, Finance Minister Bill Morneau announced that stress tests will be required for all insured mortgages to ensure that borrowers would still be able to make their mortgage payments if interest rates rise or their financial situations change.

Last year, Ottawa raised the minimum down payment on the portion of a home worth over $500,000 to 10 per cent.

Lunny applauded the changes but says it doesn’t change the financial situation of current homeowners, who may already find it difficult to make mortgage payments.

The poll by Environics Research was conducted online with 2,372 Canadian homeowners from June 28 and July 8 of this year. Survey participants were between the ages of 20 to 69 with household income of $50,000 or more.

The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.

Source: LINDA NGUYENTORONTO — The Canadian Press Published Thursday, Nov. 24, 2016 

The poll released today by Manulife Bank finds that 24 per cent of those surveyed don’t know how much is in their emergency fund, 14 per cent have not put away any funds and nine per cent have access to $1,000 or less. (GETTY IMAGES)

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Nine steps to a better credit score

(Photos.com)

My husband and I are pretty competitive, always trying to one-up each other.

It was to my chagrin, therefore, when I learned that although my credit score is excellent, his is better. I have never missed a bill payment, never carried a balance, so what could be holding me back?

According to author and former financial adviser Kelley Keehn, there are lots of innocent things that can affect your score. For example, most people don’t realize there are two important dates when it comes to paying off certain credit cards: the due date and the statement date. The statement date is when the card issuer reports your balance to the credit bureau, not the due date. So even if you pay your balance in full and on time each month, your credit score may not reflect that.

“Let’s say my due date is Dec. 8 and I have a $10,000 limit. I pay it in full before the 8th and won’t be subject to any interest,” Ms. Keehn says. “But, let’s assume my statement date is Nov. 15 – that’s a very important date as it’s the date the credit card company reports to the credit bureau, not the due date. Let’s assume I make a big purchase on the 14th, say for a reno at my home, not thinking anything of it, and pay for some hardwood costing $9,000. The next day the credit card company would report that I’m 90 per cent extended on my credit card.”

If you’re not sure of your credit rating, you can get a free report from Equifax.ca or Transunion.ca that will include your credit history and current credit outstanding. For a small fee, they will include your credit score as well. A good score is 760 or higher, and anything less needs work to improve it, Ms. Keehn says. (To order a free credit report from Transunion, click here. To order from Equifax, call 1-800-465-7166.)

She advises taking these steps to protect and improve your credit score:

1. Know your score. The score range in Canada is 300 to 900 – the higher the better – and reflects a person’s credit history over the past six years. Only 5 per cent of Canadians have a score of 850 or better. Checking your score periodically can alert you to mistakes as well as credit fraud.

2. Pay your bills on time. Making a credit card payment even one day late will hurt your score. If you’re paying online, send the payment at least three banking days before it’s due to allow enough time for the transaction to be processed. Setting up a small automatic payment to your card issuer each month will ensure you never forget to pay at least the minimum.

3. Never exceed your credit limit. If you’re close to being maxed out, make sure you pay more than the minimum or the interest due could push you over your limit. Going even $5 over your limit could lead to a costly fee from your credit card company and will hurt your score each month it happens.

4. Don’t apply for store credit cards. Even if you’re just after a one-time discount for signing up, these cards, with interest rates as high as 29 per cent, are viewed negatively by the credit bureau and drag down your score.

5. Spread out your spending. The percentage of available credit you’re using each month affects your score, so it’s better to have two charge cards at 50-per-cent capacity each than one that is maxed out.

6. Prioritize your payments. Important as they are, mortgage payments generally are not reported on Canadian credit reports, so it’s more important to make your credit card, loan and lease payments on time.

7. Beware of closing accounts. Even if you’re in a dispute with a lender, make your payments. A missed payment will show up on your credit report, can really hurt your score and is very hard to fix. When closing an account, get it in writing that it was closed with a zero balance.

8. Don’t close unused credit cards. If you have a low-interest card you don’t use, keep it open and use it periodically. Having a zero-balance credit card actually helps to improve a low score.

9. Don’t apply for too much credit at once. Don’t lease a car, sign up for a new cellphone and apply for a loan all in the same month or two. The credit bureau sees this as a sign of financial trouble. Beware, also, of being preapproved by several lenders before you’re ready to buy. Although you can check your own credit rating without penalty, preapprovals from lenders count against your score.

Source: DIANNE NICE The Globe and Mail   Published Monday, Nov. 22, 2010 6:39 AM EST  Last updated Thursday, Aug. 23, 2012 4:08PM EDT

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Can I Just Walk Away From My Debts?

DEBT

I’ve had a few people say to me recently “If you have debt, just walk away; the banks won’t do anything. My friend stopped paying, and nothing happened to him. Don’t bother with credit counselling, or a consumer proposal, just walk away.” Does that strategy actually work?

The answer depends on your situation.

In some cases the “do nothing” strategy, or walking away, is a viable option.

If you owe money to a bank, they want to be repaid. If you don’t pay them, they will follow a standard sequence of events to collect their money.

The first month you miss a payment they will include a “friendly reminder” at the bottom of your statement, saying something like “this is just a friendly reminder to make your payment; if you already made your payment, please disregard this notice.”

By the second month, the note on your statement will be less friendly: “We will suspend your account if you don’t pay.”

By the third or fourth month, collection calls will start, and you may get threatening legal letters. Eventually your account may be turned over to a collection agency, and then the phone calls and letters become even more intense.

Ultimately, if you don’t pay, the bank has three options:

  1. Stop collection actions and write off your account;
  2. Continue collecting through a collection agency;
  3. Take you to court to get a judgement, which may lead to a wage garnishment.

So when would a bank simply give up? When they have no reasonable hope of collecting from you. That may happen in a variety of situations, including when:

  • The bank doesn’t know how to contact you, because you have moved and they don’t have your address or phone number;
  • They don’t know where you work, so they can’t garnishee your wages; or
  • The bank knows that you have no wages to garnishee, perhaps because you are receiving a pension.

A creditor can only garnishee your wages if you have wages. If you are unemployed, or your income is from a source other than wages from employment, such as a pension, then there are no wages to garnishee.

So the answer to the question “can I just walk away from my debts?” is “yes”, but only if you are not worried about the repercussions of walking away. If you have no assets to seize, no wages to garnishee, and you are not concerned about a low credit score, walking away is a viable option.

DEBT

However, if you have a job, or expect to have a job in the near future, or if you have assets, walking away may not be your best option, because you put yourself at risk for a wage garnishment.

If you owe money to Canada Revenue Agency and have a job, or own a house, or have a bank account, ignoring them is very dangerous. CRA can freeze a bank account or garnishee your wages without a court order.

Here’s my advice: if you have debts, attempt to work out payment arrangements directly with your creditors. They may give you a break on the interest rate or stretch out your payments to allow you to pay them in full. If you can’t make a deal with them, and if you have more debt than you can repay, don’t wait until legal action starts. A licensed insolvency trustee will provide you with a free initial consultation to review all of your options, and they can tell you if walking away is a good option.

If you are 80 years old, and your only income is CPP and OAS, and your only debt is an old cellphone bill from five years ago, walking away is probably your best option. If you are working and can’t pay, a consumer proposal or bankruptcy may be a better option than ignoring the problem and hoping that the problem goes away.

Source : Huffington Post   Licensed Insolvency Trustee, Chartered Accountant

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