Tag Archives: credit issues

Canadians weighed down by lines of credit they don’t understand

3 million Canadians have home equity lines of credit, but half of us don’t know how they work

A survey suggests 35 per cent of Canadians have a home equity line of credit and 19 per cent said they’d borrowed more than they intended. (Canadian Press)

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Over the past 15 years, home equity lines of credit have emerged as the driver of mounting non-mortgage debt in Canada — yet many Canadians don’t understand what they’ve signed up for and are not moving to pay them off, a new survey suggests.

The more than three million Canadians holding a HELOC owed an average amount of $65,000, the study released Tuesday by the Financial Consumer Agency of Canada (FCAC) found.  About one quarter of HELOC holders had a balance of more than $150,000.

Yet 25 per cent of respondents said they only made the interest payments month to month.

Ipsos conducted the online survey of 4,800 Canadians, most of them homeowners, from June 5-28, 2018, on behalf FCAC, a federal agency that promotes financial education.

 

HELOCs are revolving credit products secured against the equity in a home. Banks can lend up to 65 per cent of the value of a home. Such lines of credit have been easy to get and banks offer them as a default credit option to anyone with home equity.

Of the homeowners surveyed, 54 per cent had a mortgage and 35 per cent had a HELOC.

Cheap source of credit

“You can’t deny the fact that for the consumer it is a cheap source of credit. However, you have to use it well,” said Michael Toope, communications strategist for FCAC.

The problem is that people borrow more than they intended and end up struggling with the debt, he said.

The survey suggested there is a lack of understanding among consumers of how these lines of credit work.

Only half of respondents knew basic facts about the terms of HELOCs, such as:

  • Banks can raise the rate of a HELOC at any time.
  • The bank can demand the balance of a HELOC at any time.
  • There are fees to transfer a HELOC to another institution.
  • The bank can raise or lower the credit limit on a HELOC.

Interest rates began climbing in 2017 and 2018 and are likely to rise further this year. That affects the interest cost of these loans and the overall cost of paying them off. Your HELOC is more expensive than a mortgage as the interest rate is higher.

“Each bank sets its own prime rate based on the Bank of Canada rate and HELOCs are usually set at prime plus a premium, but the bank can change that premium at their discretion,” Toope said.

For some, HELOCs are risky

Almost two-thirds of respondents said they used their HELOC only or mostly as intended, as a revolving line of credit.

Yet for some, HELOCs are a risky product that eats away at their ability to build wealth, Toope said.

The equity they build in their home as they pay off a mortgage is a way for Canadians to build wealth over time, but that won’t happen if they have a debt secured by the house.

“In the end, you’re losing the long-term value of the mortgage you have in your home,” Toope said.

 

In a 2017 report, FCAC found home equity lines of credit may be putting some Canadians at risk of over-borrowing.

That report found most consumers do not repay their HELOC in full until they sell their home.

About 19 per cent of respondents to the new survey said they’d borrowed more than they intended.

How much do I owe?

And 18 per cent said they did not know the full balance on their HELOC.

Among those who paid only the interest on the debt, the majority were young Canadians, aged 25 to 34. That’s not unusual, as people at that stage of life tend to have lower incomes and may be burdened with student debt as well as a mortgage, but it still indicates a lack of understanding, Toope said.

About half of respondents said they used their HELOC for a renovation, but another 22 per cent consolidated other debt. (Elise Amendola/Associated Press)

The survey found 62 per cent of those who paid only the interest expected to repay their HELOC in full within five years, a plan Toope called a “mathematical impossibility.”

 

Half of Canadians borrowed against their HELOCs for renovations, but another 22 per cent dipped into it for debt consolidation, with vehicle purchases and daily expenses also common uses, according to the survey.

“People should know what they are going to use it for and how to pay it down, so it doesn’t become an eternal revolving debt,” Toope said.

Source: CBC.ca – Susan Noakes · CBC News · 

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Mark Cuban Says the Best Investment Is Paying Off Your Debt — Is He Right?

Mark Cuban Says the Best Investment Is Paying Off Your Debt -- Is He Right?

Image credit: Invision/AP/REX/Shutterstock via GOBankingRates

Billionaire investor and Shark Tank star Mark Cuban said that the safest investment you can make right now is to pay off your debt, according to an interview with Kitco News earlier this year.

 

“The reason for that is whatever interest you have — it might be a student loan with a 7 percent interest rate — if you pay off that loan, you’re making 7 percent,” said Cuban. “And so that’s your immediate return, which is a lot safer than trying to pick a stock, or trying to pick real estate or whatever it may be.”

Cuban is mostly right: More often than not, paying down debt as fast as possible is going to provide the most value in the long run. And perhaps more importantly, it will do so without any real risk that comes with most investing. That said, each person’s financial situation is different, so it is worth a closer look at when it’s better to pay off debt or invest.

Debt is like investing but in reverse.

One important thing to note is that the same principals that make investing so important also make paying off your debt similarly crucial. As Cuban points out, the interest rate on your loan is essentially like the rate of return on your investments but backward. In fact, many investments are simply ways you’re letting your money get loaned out to others in exchange for them paying interest.

As such, it’s important to keep in mind that as satisfying as it might be to watch your money grow in investments, it’s doing just the opposite when you have debt.

Every loan is different.

Although debt chips away at your net worth through interest, it’s important to note that different types of borrowing do so in very different ways. Every loan is different, with some offering terms that are actually quite favorable and others that can be excessively costly.

An overdue payday loan can lay waste to your financial health in no time, but a 30-year fixed-rate mortgage with a competitive rate can be relatively easy to manage with good planning. Borrowers should be sure they understand what kind of debt they have and how it’s affecting their finances.

 

Focus on the interest rate.

The key factor to take note of when considering how to allocate funds is the interest rate — usually expressed as your APR. Debt with a high APR is almost always going to be better to pay down before you focus on any other financial priorities beyond the most basic necessities.

The average APR on credit cards as of August 2018 was 14.38 percent. That’s well in excess of what anyone can reasonably expect to sustain as a return on most investments, so it shouldn’t be hard to see that investing instead of paying down your credit card is almost always going to cost you money in the long run.

Does your interest compound?

Another crucial factor in understanding how your debts and your investments differ is whether or not your interest is compounding. Compounding interest — like that on most credit cards — means that the money you pay in interest is added to the amount due and you’ll then have to pay interest on it in the future. That can lead to debt snowballing and growing exponentially. So, not only do credit cards have high interest rates, but they also make for debt that’s growing faster and faster unless you take action to pay it down.

However, that same principle can work in reverse. Gains on something like stocks will also compound over time, so there’s a similar dynamic at work when comparing your investment returns to fixed interest costs.

Know your risk tolerance.

Another factor that plays a big part in the conversation is your level of risk tolerance. Note that the question Cuban was responding to earlier was about what the “safest” investment was. For most people, erring well on the side of caution when it comes to something like personal finance just makes sense, and in that case, focusing on paying off debt is pretty crucial.

However, others might decide that the long-term payoffs that are possible make it worth rolling the dice on their future. Borrowing money for investments is common despite the risks associated, with everyone from massive investment banks to investors with margin accounts opting to take a calculated risk that their returns will ultimately outpace the cost of borrowing.

 

Costs of debt are set, investment returns often are not.

One important aspect of understanding the risks involved is that the cost of your debt is usually set and predictable, but the returns on your investments are not. It might be easy to look at the historical returns of the S&P 500 at just under 10 percent a year and assume that it’s worth it to put off paying down debt for an S&P 500 ETF or index fund as long as your APR is under 10 percent.

However, that long-term average does not reflect just how chaotic the markets really are. Sure, it might average out to about 10 percent, but some years will be in the negative — sometimes over 30 percent into the red. Even with bonds — where your rate of return is fixed — there is always a chance that the borrower will default and leave you with nothing.

If you have a variable rate loan

Of course, if your loan has variable interest rates, the equation changes yet again. You could see your interest rate rise or fall depending on what the Federal Reserve does, adding another layer of uncertainty to the decision — especially when it’s impossible to say with certainty which direction interest rates are headed in for the long run.

So, although debt will typically have more certainty associated with its costs than investing, that’s not always the case and variable rate loans could change things for some borrowers.

Don’t forget taxes.

You should also remember that the tax code includes a number of provisions that promote investment, and those can boost the value of investing. In particular, contributions to a 401(k) or traditional IRA are made with before-tax income, meaning that you can invest much more of that money than you would have with your after-tax income that would be used to pay down debt.

That’s especially true when you have an employer who matches your 401(k) contributions. If your employer matches, you’re essentially getting a chance to not just avoid paying taxes on that income, but you’re doubling its value the moment you invest — before it’s even started to accrue returns.

 

Some opportunities are unique.

Another important factor to consider is what type of investments you can make. In some very specific cases, you might have access to an investment opportunity that brings with it huge potential returns that could tip the scale. Maybe a specific local real estate investment you’re particularly familiar with or a startup company run by a family member where you can get in on the ground floor.

Opportunities like this usually come with enormous risks, but they can also create transformational shifts in wealth when they pay off. Obviously, you have to gauge each opportunity very carefully and make some hard choices, but if you do feel like it’s a truly unique chance to get the sort of returns that just don’t exist with publicly-traded stocks or bonds, it might be worth putting off paying down debt — especially if those debts have fixed rates and a reasonable APR.

What really matters with debt and investments

At the end of the day, you certainly shouldn’t opt to invest money that could be used to pay down debt unless the expectation for your returns is greater than the interest rate on your debt. If your personal loan has an APR of 15 percent, investing in stocks is probably not going to return enough to make it worthwhile. If that rate is 5 percent, though, you could very well do better with certain investments, especially if that’s a fixed rate that doesn’t compound.

But, even in circumstances where you might have reasonable expectations for returns higher than your APR, you might still want to take the definite benefits of paying down debt instead of the uncertain benefits associated with investments. When a wrong move might mean having to delay retirement or delay buying a home, opting for the sure thing is hard to argue with.

Which decision is right for you?

Unfortunately, there’s no magic bullet for knowing whether your specific circumstances call for you to prioritize paying down debt over everything else. Although paying down debt is typically going to be the smartest use for your money, that doesn’t mean you should do so blindly.

Putting off paying down your credit card balance to try your hand at picking some winning stocks is a (really) bad idea, but failing to make regular 401(k) contributions in an effort to pay off your fixed-rate mortgage a couple of years early is probably going to cost you in the long run — especially if you’re missing out on matching funds from your employer by doing so.

So, in a certain sense, Mark Cuban is right: Paying down debt is very rarely going to be a bad idea, and it’s almost always the safest choice. But that said, it’s still worth taking the time to examine the circumstances of your specific situation to be sure you’re not the exception that proves the rule.

Source: Entrepreneur – Joel Anderson , 

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3 things you probably didn’t know about your credit score

A photo illustration shows charts for credit scores on a computer in North Vancouver, B.C., Wednesday, June, 15, 2016.

A photo illustration shows charts for credit scores on a computer in North Vancouver, B.C., Wednesday, June, 15, 2016.

Jonathan Hayward/The Canadian Press

Here’s what most Canadians likely know about their credit score: It’s a number somewhere on a scale from 300 to 900 — and the higher that number, the easier and cheaper it generally is to get credit.

If you want to take out a mortgage or auto loan, a good credit score improves your chances of being approved and getting a lower interest rate. A high score may also give you access to instant-approval credit cards and loans.

 

But here’s something you probably didn’t know:

No one really knows exactly how credit scores work

For obvious reasons, Canada’s two credit-reporting agencies, Equifax and TransUnion, do not reveal the exact formula through which they come up with credit scores. If they did, it would become easy for anyone to game the system.

READ MORE: Can’t afford to pay your tax bill? Here’s what you can do

The implication here is that most advice you get about how to improve, build or repair your credit score is really an educated guess. Based on anecdotal evidence and what they see dealing with clients, financial advisers have a pretty good idea of how different types of behaviour affect credit scores. But they can’t tell exactly how much of a difference each one really makes.

That’s why Douglas Hoyes, a licensed insolvency trustee at Kitchener, Ont.-based Hoyes, Michalos and Associates, is skeptical of strategies that entail taking out costly loans just so you can supposedly build or repair your credit score faster.

WATCH BELOW: Huge price to pay for payday loans

Borrowing at, say, 30 per cent interest is guaranteed to cost you a pretty penny. The gain, on the other hand, it quite uncertain. Taking out a loan will definitely improve you score if you make your payments on time, but how much of a difference will it really make? No one can say for sure.

Given the uncertainty, Hoyes advises borrowing through the lowest-cost debt you can access and trust that your credit score will gradually improve if you keep on top of your finances.

WATCH BELOW: Dollars and sense: Credit score basics

For those with no credit history or a poor credit score, a good first step is getting a secured credit card such as the Home Trust Visa, according to Hoyes. “Secured” credit means the lender will ask you to put down, say, a $1,000 security deposit for a $1,000 credit card limit. The point of such a credit card isn’t to borrow money to finance expenses for which you don’t have cash at hand but to show that you can make disciplined debt repayments.

Secured credit cards normally come with steep interest rates. The no-fee version of the Home Trust Visa charges interest of 19.99 per cent, but borrowers need not worry about it if they pay off their balance in full and on time, Hoyes noted.

 

Credit scores are designed with banks, not you, in mind

You might think that diligently paying off your credit card bills as soon as they come would get you the best possible score. You might be wrong.

Some financial advisers and debt management experts believe carrying a small balance of up to 30 per cent of your available credit on your card might actually boost your score more than having a balance of zero.

That’s because “credit scores are meant for the benefit of the banks, not you,” said Hoyes.

Banks are happy with customers who reliably repay their debt. But they also make money off charging interest. So they may be happiest with customers who will eventually repay their debt but keep carrying a balance, on which they’ll have to pay interest, explained Hoyes.

He advises doing what’s best for your pocketbook and skipping on financial behaviour that will ultimately cost you more — even if it means your credit score will be a bit lower.

 

Credit scores don’t matter as much as you think

A third thing to keep in mind about credit scores is that they aren’t necessarily the only metric a bank will use to assess your creditworthiness. “Banks may have their own formulas, too, which are different from whatever Equifax and TransUnion are using,” noted Hoyes.

Finally, he added, a bad credit score won’t shut you out of borrowing forever. Even bankruptcy is something you can recover from relatively quickly, if you have a good, stable job and show financial discipline, said Hoyes.

“I have plenty of clients who bought houses two years after being discharged from bankruptcy,” he told Global News.

READ MORE: Why it’s important to check your credit history

Source: Global TV –

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Tips to repairing bruised credit

Tips to repairing bruised creditThe importance of a high credit score is, unfortunately, lost on many borrowers, but with a little discipline and dedication, they can get back on track.

Everything from paying extra fees to larger down payments are some of the consequences borrowers with bruised credit contend with, and according to CanWise Financial’s President James Laird, it’s imperative that clients are taught the finer points of responsible payment.

“If it’s not a bankruptcy sheet and not a consumer proposal, we most commonly see borrowers who have balances over their limit, so while it’s somewhat counterintuitive, get a higher limit because it helps your credit score if your spending habits don’t change,” he said. “Someone who spends the exact same amount of money—let’s say $2,200 with a $10,000 limit—you have an excellent score, but if your limit is $2,000 your credit is being severely damaged.”

Speaking of counterintuitive, Laird advises clients trying to rehabilitate their credit not to make payments before the end of the month. If it’s paid too quickly, it’s like the money was never owed in the first place.

credit

“Sometimes we see the most organized people pay off their credit card right before the month turns over, and in that case, credit companies will stop reporting to the bureau,” continued Laird. “If you pay it off the same month you spend it, it’s like you’re not paying any money. Let the month turn over and make your payment during the interest-free period—like within 10 days or whatever you have—because you have to show that you owe a bit and that you’re diligent at making payments. If you pay it off before the end of the month, it’s like you never owed the money.”

In the case of bankrupts, their credit facilities will have been closed down, and Laird recommends getting two new ones that report to the credit bureau so that rehabilitation can begin.

creditscore

“It’s important to get new credit facilities up and going as soon as possible after you’ve had an issue,” said Laird. “We recommend that if someone has gone through bankruptcy or a consumer proposal, they can still get a prepaid VISA, and most of those report to the bureau, and that will start repairing your credit score.”

Daniel Johanis, a Rock Capital Investments broker, always reminds clients with bruised credit that their utilization must be 50-70%.

“If it hits 90% or higher, it’s showing the bank that your ability to repay outstanding debt is challenged because you’re at the point where you’re a higher risk for missing a payment or not meeting your monthly debt obligation.”

For borrowers well on their way to repairing bruised credit but who may have been hit with by an unforeseen, and expensive, circumstance, Johanis recommends making a call to the bank or credit holder.

“Making a simple call and saying ‘I’m behind and I need to get caught up, so can we figure out a repayment plan?’ is surprisingly effective,” he said. “They’ll often work with you because they don’t want you to default. It’s always worth giving the credit holder a call to see if they can do anything. It buys you time.”

Source: MortgageBrokerNews.ca – by Neil Sharma 09 Nov 2018

 

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Second mortgages in Canada: 6 reasons you may need one

We’re living in a world where certain financial obligations must be settled on time. It could be college tuition, renovation costs, emergency repair bills, debt consolidation or even paying for a wedding. Whatever it is, it can’t wait, and it needs to be resolved as soon as possible.

As the saying goes, time waits for no one. And, neither do the bills lurking around the corner.

So what are your options? You may think of getting another credit card, but you’re past the limit or have a poor credit score. Traditional lenders have turned you down too, and you couldn’t be more disappointed.

However, if you’re a Canadian currently paying for a primary mortgage, you could have an ace in the hole to sort out your financial hurdles. This is where a second mortgage comes in.

What are second mortgages?

A second mortgage is a secondary loan held on top of your current mortgage. A different mortgage lender will typically provide this product. It’s important to note that second mortgages have their own rates and terms, and is paid independently of your primary mortgage.

In layman’s terms, second mortgages are loans that are secured by your home equity. Usually, you can acquire up to 80 percent of your home equity through a second mortgage and if you’re in a major city, up to a maximum of 85 percent.

In contrast to the primary mortgage, a second mortgage has its own terms and conditions. Hence, the second mortgage is paid separately with different rates from the first mortgage. Nonetheless, in case of a default, the second mortgage will only be repaid after the primary mortgage has been sorted out.

So what are some of the reasons you may need a second mortgage?

1. You want to pay off high-interest consumer debt

A recent report released by Statistics Canada shows that for every dollar of disposable income, Canadians owe $1.68 in credit market debt. In fact, Statistics Canada estimates that the accumulated consumer credit is $627.5 billion; not including mortgages. If you’re an average working Canadian, it is very likely that you have consumer debt.

Keep in mind that the average credit card interest rate in Canada is 19.99 percent. Of course, the longer you delay the payment, the more you keep paying higher interest rates. No wonder, most Canadians prefer low-interest credit cards.

However, there is another option. Even though the interest rate of a second mortgage is higher than the primary mortgage, it is lower than the accrued interest on credit cards and personal loans. A minimum payment of a second mortgage can be much lower than that of a credit, creating better cash flow for the borrower.

That means you can acquire a second mortgage to pay off high-interest consumer debt and save a lot of money in the long-run.

2. You have a poor credit score

According to the Huffington Post, the average Canadian credit score is 600 points. If you’re a Canadian, anything below 650 points is considered a bad credit score and you will probably find it challenging to obtain new credit.

Maybe it was that single loan that you defaulted for a month or that credit card charge-off—as long as you have a poor credit score, you will likely be the last in line when applying for loans.

The good news is that you can get a second mortgage even with a poor credit score. The lender can overlook the poor credit score based on your consistency on paying the primary mortgage and if you have a lot of home equity, albeit the interest rate will be higher due to the risk involved.

If you can pay off bad credit loans and defaulted debts by leveraging a second mortgage, you can start to repair your credit.

3. You’ve been turned down by traditional lenders

You never know when mortgage rules will change. Since the recent strict new rules on mortgage lending, more Canadians have been turned down by traditional lenders. In fact, mortgage brokers reckon that the rejection rate has increased by 20 percent. Even those who were approved for a mortgage before 2018 can have their mortgage renewal or refinance request turned down due to the stress test.

So what should you do if you’ve been turned down by traditional lenders? Simple; apply for second mortgages offered by private lenders. Unlike traditional banks, private lenders don’t have their hands tied down by the new OSFI rules.

4. You need funds quickly

There are many reasons why you would need quick funds. Perhaps you’ve experienced an unexpected tragedy or looking for a new job, and you need quick cash until you’re back on your feet.

You could go for an unsecured loan, but you don’t want to end up paying high-interest rates. Payday loans are even worse, the fees and interest rates are exaggerated. Even if you did get a payday loan, the credit limit is $1500, and you probably need more than that.

What about RRSP withdrawal? Well, you will get penalty taxes for making that early withdrawal. For instance, if you withdraw $30,000, you will only receive $21,000 after the bank remits $9000, or 30 percent, to the government.

On the other hand, second mortgages will give you liquidity to your home equity without too much interest rates or taxes especially if the amortization is short-term.

5. You want to avoid high mortgage penalties

Prepaying the remaining balance of a closed low fixed rate mortgage loan can be expensive for Canadians. Most lenders will impose a breakage fee if you decide to walk out of the contract before the term expires. Sometimes, the mortgage lenders can overestimate the liability and proceed to double or triple the penalties, leaving you in a tight spot.

Nevertheless, instead of pre-paying the first mortgage early and selling the house to gain funds for investment capital or debt relief, you could apply for a second mortgage to access the funds and wait a little longer. A short-term second mortgage would prove to be cheaper than paying the high mortgage penalties.

6. You want to outsmart PMI

Canadians who can’t afford 20 percent down payment of the property’s value when applying for a mortgage are required to pay private mortgage insurance (PMI). There are also borrowers who don’t want to give out the 20 percent down payment so they can have funds for renovation and repairs. Even so, PMI premium rates aren’t cheap especially if you’re putting up 5% to 9.99% down payment.

But did you know taking a second mortgage could lower the overall mortgage expenses than going the PMI route? Despite second mortgages having higher annual payments than first mortgages, they cost less than PMI.

Consult a professional to find a convenient second mortgage

As much as applying for a second mortgage seems like a straightforward process, finding a second mortgage without professional assistance is like climbing a slippery mountain without a harness.

Every situation is different, and there are always details in the contracts that you need to understand clearly.

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The solution to debt isn’t more credit

Here’s the litmus test for determining if you have too much debt: if your income was delayed, could you pay your monthly bills? “If you couldn’t meet those expenses, you’ve got too much debt,” says Doug Hoyes, licensed insolvency trustee for debt relief experts Hoyes, Michalos & Associates. “We often see our clients facing this situation. They might think the answer is to borrow to alleviate the immediate problem. But the solution to too much debt is not to get into more debt. You have to get off the hamster wheel.”

The cycle Hoyes is talking about goes something like this: Something happens to cause an initial shortfall. It might be that you get sick, injured, lose your job, split with your partner. You start to put too much on your credit cards and you can’t pay them off. “Then, you get an additional credit card and you continue to rack up more and more debt on your cards. The number of cards and balances keep going up.”

When you’re finding it difficult to make ends meet, more borrowing isn’t the answer.
When you’re finding it difficult to make ends meet, more borrowing isn’t the answer.  (CONTRIBUTED)

Now you have a problem, so you decide to solve it by consolidating your debt. You might try and apply for a line of credit, which you may not qualify for, or get a payday loan with monstrous interest rates. “Once you start getting payday loans, it’s very difficult to recover,” warns Hoyes. “In some instances, payday loans cost you $15 for every $100 you borrow. In order to pay it off, many of our clients have to get another payday loan.”

So how do you stop this cycle of debt? “Rather than continuing to add more to what you already owe, it’s important to stop borrowing and stop the bleeding,” says Hoyes. He suggests taking an inventory of what you owe and then making an honest budget to see if you can find a way to pay it back on your own. “You might also consider ways to add income rather than just deal with expenses. Perhaps you get a second job or a roommate to help with expenses.” In the likely situation where you discover you can’t do it on your own, consider talking with a Licensed Insolvency Trustee to help you find a way to pay off a few debts.

For most clients, the best way to deal with debt is a consumer proposal or bankruptcy, explains Hoyes. “In a consumer proposal, we make a deal to pay back considerably less than the amount owing. Instead of making minimum payments for decades or declaring bankruptcy — your last resort — with a consumer proposal, you pay an agreed amount that’s much less than what you owe over a five-year period. Then three years later, it comes off your credit report.”

As Hoyes explains, it’s not about consumers running from debt. “It allows them an opportunity to make manageable payments and ultimately, get a fresh start.”

 

Source: The Star – Thu., Aug. 16, 2018

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Late payments set to rise on Canadians’ $599-billion of credit card, non-mortgage debt, Equifax predicts

‘We will start to see delinquency rates inching up a little bit, and debt probably slowing down,’ as Bank of Canada starts raising interest rates, credit agency says

Canadian delinquency rates, which have been declining since the last recession, will probably reverse and begin to climb by the end of 2018 as the central bank presses ahead with interest rate increases, according to the country’s largest credit reporting firm.

Regina Malina, senior director of analytics at Equifax Canada, predicts late payments on the country’s $599 billion (US$455 billion) of credit card, auto and other non-mortgage consumer debt will begin to move “modestly higher” by the end of this year.

“Our prediction is that we will start to see delinquency rates inching up a little bit, and debt probably slowing down,” Malina said last week in an interview.

The delinquency rate — which measures the number of payments on non-mortgage debt that were more than 90 days past due — was 1.08 per cent in the first quarter, up slightly from the fourth quarter but still close to the lowest level since the 2008-09 recession.

The Toronto-based analyst declined to estimate how high delinquencies will climb, saying it depends on the pace of interest rate increases and what happens in the trade battle between the U.S. and Canada. She cited the experience in Alberta, where delinquency rates rose in some instances 20 per cent or 30 per cent on a year-over-year basis after the oil-price collapse. Such an extreme case, however, isn’t what Equifax is predicting. “It will only happen if we start seeing deterioration in employment numbers,” she said, adding delinquencies should remain “still very low,” and “they’re just going to start inching up a little bit, probably not double digits.”

CHANGE COMING?

Household credit has ballooned to unprecedented levels in Canada, as in many other developed countries, amid historically low interest rates. That hasn’t posed too many difficulties so far, because the economy and the labour market have generated solid growth, allowing people to handle servicing costs. But with the Bank of Canada intent on raising rates and the U.S. and Canada engaged in a tit-for-tat tariff fight, that could change.

A red flag in the Equifax data was a decline in the share of people who completely pay off their credit cards each month. The 56 per cent who did so in the first quarter matched the fourth-quarter number and was down from as high as 59 per cent last year. It’s a small but important detail, according to Malina.

“The changes aren’t big, but when they’re consistent and we see it for two or three quarters, we start to believe it,” she said. “Given that less people are making their credit card payments in full, and those people are usually people with lower delinquency rates, we might be seeing overall delinquency rates deteriorating.”

A red flag in the Equifax data was a decline in the share of people who completely pay off their credit cards each month. Elise Amendola/AP Photo file

Consumer debt including mortgages was $1.83 trillion in the first quarter, up 0.4 per cent from the end of 2017 and 5.7 per cent from the same quarter a year earlier, Equifax said.

Excluding mortgages, Canadians carry an average of $22,800 each in debt. Some other highlights from the report include (all figures exclude mortgage debt):

Those between the ages of 46 and 55 have the highest average debt loads, at $34,100.

That age group is also seeing the largest increase in debt, year-over-year, at 4 per cent.

Of nine cities listed, Fort McMurray, Alberta, had the highest average debt levels, at $37,800, as well as the highest delinquency rate, at 1.72 per cent.

Vancouver and Toronto saw the highest rate of debt accumulation in the first quarter, with 5.2 per cent and 5 per cent growth from a year earlier Montreal is the least indebted city, with average debt loads at $17,300 Ontario and British Columbia have the lowest delinquency rates, at 0.95 per cent and 0.84 per cent. Nova Scotia, at 1.74 per cent, had the highest.

Source: Bloomberg News Chris Fournier

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