Tag Archives: credit issues

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.

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.

 

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.

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Bankruptcy scores: Why lenders may turn you down despite a good credit score

Few borrowers know about bankruptcy scores, but lenders have been using them for years.

Few borrowers know about bankruptcy scores, but lenders have been using them for years.

Few have heard of them, but they’ve been around for a few years: Bankruptcy scores.

Most Canadians know about credit scores, and some are acutely aware of their three-digit number. Where you fall on a scale from 300 to 900 can affect whether or not you qualify for a mortgage for your dream house, a car loan or a credit card and how much you’ll pay for the privilege of borrowing that money.

 

But there’s often another set of numbers that could cause lenders to deny you a loan or hike your interest rate — even if your credit score doesn’t look so bad. Financial institutions often rely on bankruptcy scores to gauge the probability that you’ll go financially belly up in the next 12 to 24 months.

Credit reporting bureau Equifax has a Bankruptcy Navigator Index that it says allows lenders to “uncover the financial red flags not so obvious at first glance.” And competitor TransUnion has its own CreditVision Bankruptcy Score.

 

The latter “is an empirically-derived model designed specifically for the Canadian market,” TransUnion Canada told Global News via an emailed statement. “The score ranges from 100 to 950, with lower scores indicating a higher risk of filing for bankruptcy or [a consumer] proposal,” the company added, noting that financial institutions, telecom companies and lenders in the auto-loan industry, among others, use it.

TransUnion has had bankruptcy scores for a number of years but introduced its CreditVision score in 2015, it said.

Equifax did not respond to two requests to provide additional information on its Bankruptcy Navigator.

 

How bankruptcy scores work

Bankruptcy scores are aimed at detecting risky borrowers that sometimes go under the radar with traditional credit scores, licensed insolvency trustee Doug Hoyes told Global News.

“It turns out that there is a significant difference in behaviour between the person with bad credit who will not file bankruptcy and the person with a similar bad credit score who will declare bankruptcy and this is what your bankruptcy score measures,” Hoyes, co-founder of Ontario-based debt-relief firm Hoyes Michalos, wrote in a blog post.

 

Sometimes, there’s a lag between when an overstretched borrower reaches the point of no return and when that reality will be reflected in his or her credit score. It’s possible for people with scores in the 600-700 range to be on the verge of defaulting on their debt repayments, said David Gowling, senior vice-president at debt consultancy MNP.

“Some people come in telling me how great their credit score is, but then you find out they’re using one type of credit to pay another type of credit,” Gowling told Global News. And because they’re still able to make minimum payments, “the credit score hasn’t caught up,” he added.

According to Hoyes, compared to someone with a bad credit score who will stay afloat, someone who is at high risk of going bankrupt tends to:

  • Use credit more often;
  • Apply for credit more often and have more recently acquired debts or credit accounts;
  • Have fewer accounts in collection. (This is because people who rely on debt to pay more debt are often careful about not missing payments in the belief that this will grant them access to more credit);
  • Have a higher credit utilization rate, i.e. carrying a credit balance that takes up a large percentage of your borrowing limit.

 

While credit scores are a look at your borrowing history in the rear-view mirror, bankruptcy scores likely pick up on these telltale signs of might happen in the near future, Hoyes told Global News.

In general, the credit file of someone at high risk of bankruptcy tends to show much more recent activity, which is why applying for new credit in an attempt to improve your credit score can backfire, according to Hoyes.

WATCH: Lenders behave like car insurance companies: If you don’t have a driving record, you’re automatically a very risky driver.

What bankruptcy scores mean for you

Bankruptcy scores affect borrowers in three main ways, Hoyes said. Like credit scores, they can influence both how much you’ll be able to borrow and at what rate. But they could also result in lenders deciding to sell your debt to so-called debt buyers.

 

Debt-buyers are companies – sometimes collection agencies – that buy delinquent debt at a deep discount and then try to collect some of that debt.

If a lender has, say, 100 borrowers who are late making debt repayments, it can use a bankruptcy score to decide which ones to offload to a debt-buyer. Selling the riskiest accounts for a fraction of the face-value of the credit balance means writing off some debt, but the loss for the lender might ultimately be less than if the borrowers filed for bankruptcy.

The thing is, though, that there’s no way to know what your bankruptcy score is. While consumers can review their credit reports and purchase their credit scores, bankruptcy scores are typically only available to lenders.

The key takeaway, though, is that if you’ve reached the point where you’re using new debt to pay old debt, your decent-looking credit score is probably meaningless.

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BREAKING THE CYCLE OF BAD MONEY HABITS IN BLACK FAMILIES

African American girl puts money in piggy bank

One thing that traditionally hasn’t been a strong suit in the Black family – and simultaneously, a detriment – is passing down healthy money habits to ensure financial stability for future generations.

In the technology age, however, that is beginning to change as more Black parents are building a foundation for their children to learn financial responsibility at an early age, hoping it’ll drive their decision making in adulthood.

“There is nothing righteous about struggling for your financial security,” Sabrina Lamb, a financial literacy educator, explained in the Pittsburg Post-Gazette. “It is actually a perfect storm of low self-esteem, lack of knowledge and generational conditioning.”

In order to break bad generational habits of spending money, parents must first take an introspective look to see how they’ve been holding up financially – only then can a parent truly impart wisdom on their child about good spending habits.

Here are some tips to start the conversation with your young ones.

Save, save, save!

It’s never too early to show your child the importance of saving money. On birthdays and holidays, for example, teach your child to put at least 30 percent of the cash they received into a piggy bank  – or, an actual bank savings account.  This will become routine so every time your little one gets some extra cash as a gift, they’ll immediately think to save it.

Teach the value of money.

So many children actually think money just appears into their parents’ pockets. Be direct in teaching your child that that’s not the case. Think about ways to make your child work for the money they’re seeking to purchase toys, video games or anything else they like – perhaps, a weekly payout for chores. This way your children will feel some type of way when spending the money that they actually worked their butts off for.

Discuss bills and budgets openly.

Now, it’s typical in many traditionally Black households that adults frequently tell children to stay out of “grown folks business.” Because of this, Black parents tend to never discuss any financial hurdles they may be facing – such as problems making mortgage payments – or even the growing costs of bills. It’s important to show your children how bills work. Like, for example, how leaving the lights on in every room translates into how much money the family owes on the monthly electricity bill.

Practice what you preach. 

Children mimic everything they see their parents do. So, if you recklessly use your credit cards to buy clothes, jewelry and other non-necessities at the mall, your children will adopt that behavior without understanding the consequences of it. Be the financially responsible person that you want your children to be.

 

Source: BlackDoctor.org – 

African American girl puts money in piggy bank

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How new mortgage rules hammer indebted households

The Toronto housing market’s rotten January has thrown a scare into veteran mortgage broker John Cocomile.

A lot of Mr. Cocomile’s business in recent years has been mortgage refinancings, which are like a financial-stress reducer. When your household debt gets too high, refinancing takes the pressure off by folding all your borrowings in with your mortgage. What worries Mr. Cocomile is that the latest developments in housing make it much harder to refinance.

We’ve seen household-debt levels push ever higher in recent years, with no evident repercussions in terms of more people being unable to repay what they owe. Now that refinancings are no longer an easy fallback, Mr. Cocomile thinks we’ve hit an inflection point where more people will find their debt unmanageable. This could be the year debt gets messy.

A big reason why Toronto home sales fell 22 per cent compared with January, 2017, was the introduction of new mortgage regulations designed to make the housing market more stable going forward.

The rules include a stress test that applies to anyone with a mortgage that isn’t insured against default. Typically, this means people with a down payment of 20 per cent or more and people who are refinancing.

The stress test is designed to see if borrowers can afford interest rates that are higher than the abnormally low levels of today. At Mr. Cocomile’s office, a lot of people are flunking the test. He’s had 10 people contact him about refinancing this year who did not end up qualifying. “All 10 would have qualified a year ago,” he says.

Meanwhile, debt loads are getting heavier to carry. The Bank of Canada has increased its trend-setting overnight rate three times since last summer, and the cumulative rate increase on some kinds of debt is a hefty 0.75 of a percentage point.

In the past few years, Mr. Cocomile would do roughly 60 refinancings a year for people with an average $70,000 in non-mortgage debt that he summarized as “a smattering of credit-card debt, plus lines of credit.” The usual procedure was to put them in a new mortgage that included credit-card and line-of-credit debt. The logic here is that the mortgage has a much lower interest rate than other forms of debt, and payments are manageable because they’re stretched over the life of the mortgage.

Even so, Mr. Cocomile finds that clients usually have to go with a 30-year amortization in their refinanced mortgage. Paying off your mortgage over 30 years isn’t possible when you have an insured mortgage, but you can still do it with a down payment of 20 per cent or more.

Refinancings in which people increased the amount they owe accounted for 21 per cent of the one million or so new mortgages issued in 2016, the most recent numbers from Canada Mortgage and Housing Corp. show. That’s an increase of 3.8 per cent over the previous year.

You’re usually allowed to refinance no more than 80 per cent of the value of your home, a modest limitation in hot real-estate markets where rising prices have steadily handed people more home equity to work with. “People could refinance because the value was there,” Mr. Cocomile said. “They call me and say, ‘My neighbour’s house just sold for $1.7-million, can I pull some equity out? I want to do a refi.'”

Toronto real estate’s rotten January suggest people may be a bit disappointed in what their homes are worth now. The price of detached homes in the city fell 9 per cent on a year-over-year basis, even as condo prices rose 14.6 per cent. Mr. Cocomile finds that home appraisers are reacting to the current environment by getting more conservative with their assessments of how much homes are worth.

Refinancing your mortgage by folding in other debts makes sense in theory because you’re converting higher-rate debt into a mortgage, which typically has a very low rate. But a refinance does nothing to address the behaviour that leads people to over-borrow. In fact, some people have exploited rising house prices by doing multiple refinancings over time to ease their debt loads.

It’s arguably a good thing that refinancings are harder to get in 2018. With rates rising, it’s time for households to attack their debt, not accommodate it.

 PLAY VIDEO4:53
Preet Banerjee examines the pros and cons of switching to a fixed-rate mortgage.
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Source: Globe and Mail –
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How to improve your credit score

creditscore

 

A credit score of 700 gets you the best lending rate from the banks. But if you’ve missed some bill payments—or worse, filed for bankruptcy—you’ll have to work strategically to build your score back up. These tips will help you do it as quickly as possible.

KNOW YOUR LIMITS Try to keep your credit-card balance well below the limit. If your cards are almost maxed out, it suggests you’re overextended and more likely to make late or missed payments. The higher your balance, the more impact it has on your credit score.

CHECK YOUR SCORES—BOTH OF THEM Anyone contemplating a bank loan should check their credit score six months to a year in advance to ensure there are no surprises or errors. Just keep in mind that Canada has two major credit-reporting agencies: Equifax and TransUnion. This can lead to significant differences in scores, as these firms only synchronize their scores every two months.

STEER CLEAR OF RETAIL CARDS The next time you’re tempted to sign up for a Brick or Sears card, remember that each separate credit card application inquiry results in a ‘hard check’ that lowers your credit score by seven points. If your score is around 700 and you’re house hunting, signing up for a couple of retail cards could mean the difference between getting the best mortgage lending rate or a much higher ‘B-lender’ rate.

JUST PAY IT Paying off your debts quickly is one of the most effective ways to raise your score. If you’ve missed some bills and your score hovers around 600, it will likely take a year to boost it up 100 points to an optimal 700—assuming you’ve made good on all arrears. A score of 500, indicating bankruptcy, will take two to three years to repair.

HISTORY COUNTS If you have no track record of borrowing money and paying it back, chances are you’ve got a low credit score because lenders have nothing to gauge your credit worthiness against. So if you have a credit card but never use it, you can increase your score by making occasional purchases and paying them off. And think twice about closing an old account you don’t use anymore, as having a 10-year-old account actually helps you demonstrate a credit history.

MoneySense.ca – by   

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5 things your debt collector isn’t telling you

For starters, evening calls are off limits

1. You don’t have to pay me. In most provinces, there’s a two- to six-year statute of limitations for collecting debts that comes into play after you make your last payment. If the statute has expired, you don’t technically have to pay a cent. Be careful though: Making a new payment or a written acknowledgement restarts the statute.

2. My deadlines are bogus. “Whenever a bill collector gives someone a deadline, 99% of the time they’ve just picked it out of the air,” says debt expert and author Mark Silverthorn. He’s simply trying to create a sense of urgency to intimidate you. Your response? Keep calm and don’t rise to the bait.

3. I can’t contact you more than three times a week. After an initial conversation with you, most provinces forbid debt collectors from contacting debtors more than this—and phone calls, emails, even voice mails all count. So if a collector is exceeding this, inform him he’s breaking the law. Just the fact that you’re aware should spook him.

4. Evening calls are off limits. In most provinces, collectors can’t call early in the morning or late at night. Take Ontario, where contact between 9 p.m. and 7 a.m. is forbidden. On Sunday, it’s limited to between 1 p.m. and 5 p.m. If you’re getting contacted outside lawful hours, be sure to keep records of the phone number and time of call, and file a complaint with a provincial regulator.

5. I probably won’t be suing you. Original creditors usually decide to sue within six months and typically won’t do it for amounts under $4,000. (Worth noting: They are more inclined to sue home owners). Third-party collection agencies, on the other hand, collect commissions on the amount of arrears they can get from you, and generally aren’t in the business of suing, says Silverthorn. In fact, they pursue legal action on fewer than 10% of their accounts. “As long as you’re getting the collection calls, then you are probably not going to be sued.”

 

Source MoneySense.ca – by  

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Good debt, bad debt and good bad debt

 

Canadians owe more money than ever, but not all debt will kill you

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: MoneySense.ca – by  January 5th, 2016

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