Tag Archives: credit score

Indebted seniors among Canada’s most at-risk sectors

Indebted seniors among Canada’s most at-risk sectors

 

Indebtedness among Canada’s elderly population is on the rise, according to academics and financial experts at an international conference at Ottawa’s Carleton University last week.

Contributing to this trend—not just in Canada, but worldwide as well—are multiple pressures that include easy credit, unreliable pension plans, divorce among seniors, unmonitored spending by people with dementia, and financing the needs of younger family members.

Compounding the issue is a similar growth in the number of people in late middle age who are quitting employment or taking on even greater debt, either to care for their aging parents or to help their adult children buy their own homes.

“There is the worldwide phenomenon of older people who go into debt to help their children,” Carleton University School of Public Policy and Administration professor Saul Schwartz said, as quoted by the Ottawa Citizen.

Earlier this year, a global survey commissioned by HSBC found that 37 per cent of young Canadians who currently have their own homes used the “Bank of Mom and Dad” as a source of funding. Meanwhile, 21 per cent of millennial home owners moved back in with their parents to save for a deposit.

Schwartz, who was one of the conference’s organizers, added that Canadian seniors suffer from a lack of source that provides impartial advice.

“You can talk to your bank. But if the advice is free, it’s probably not unbiased,” he explained.

A study conducted by Equifax Canada and HomEquity Bank last year uncovered that 16.5 per cent of people aged over 55 were carrying mortgages. The average mortgage balance in this demographic swelled from $158,000 in 2013 to $176,000 in 2015.

Bankruptcy trustees Hoyes, Michalos & Associates Inc. have warned that seniors were the fastest-growing risk sector for bankruptcies.

“The share of insolvency filings for debtors aged 50 and over increased to 30 per cent in our 2015 study compared to 27 per cent in 2013,” the Ontario-based firm warned, adding that on average, debtors aged over 50 held unsecured debt of over $68,000 (over 20 per cent higher than the average debtor).

 

Source: Mortgage Broker News – by Ephraim Vecina15 Aug 2017

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Debt horror stories are ‘the new normal’ in Canada

On any given day now you can expect to hear at least one economist, public official or financial commentator express grave concern about the mountain of debt Canadians now carry. The bloated debt loads of Canadian households has become a pervasive topic in media. But for all the attention the subject has received, it’s a safe bet that most people still cling to very clichéd notions that only so-called “deadbeats” ever hit the debt wall. Nothing could be further from the truth. The reality is Canadians would be shocked if they could peer into the private financial lives of many of their closest neighbours and friends.

As a licensed insolvency trustee firm, our practice is on the front lines of Canada’s household debt binge and the bad personal finance habits that ensnare so many people. And what we see every day is that the majority of those grappling with serious debt trouble are the most typical individuals and families you could imagine.

Here is just a sample of recent files that have crossed our desks: A staff accountant with multiple lines of credit, several maxed-out credit cards, a big mortgage, a significant home-equity line of credit (HELOC) and two leased luxury cars; a TTC driver with two mortgages and $100,000 in unsecured lines of credit; a teacher with eight payday loans and a senior financial analyst at a chartered bank with seven credit cards, all carrying high balances. I could go on and on.

Those disturbing financial cases are no longer the extreme end of the spectrum that they were at one time. They are the “new normal” in our trustee practice. The real horror stories are far worse, albeit less frequent.

The normalization of excessive debt is reflected in the data that Statistics Canada regularly releases. The household debt-to-income ratio now stands at 169.4, up 23 per cent from a decade ago, and on par with what the U.S. saw at the peak of its housing bubble. Of course, such figures are averages. According to the Bank of Canada, close to half of all high-ratio mortgages originated in Toronto were to borrowers with loan-to-income ratios in excess of 450 per cent.

A growing number of the clients we see have all the trappings of a middle class lifestyle—they’re gainfully employed, own a home and from the outside seem fiscally responsible—but it’s built on a foundation of debt and bad financial decisions. Many cases involve large tax arrears, such as a real estate broker who owes $383,000 to the Canada Revenue Agency in unpaid income tax. Others involve failed businesses. Then there are the frequent cases where financial companies inexplicably lend vast sums to underemployed people, even as their debt loads balloon out of control—in one case, a senior who emigrated to Canada 15 years ago, had never worked and been on a very low disability pension since shortly after arriving, owed more than $200,000 in credit card debt.

While the causes for these horror stories are varied and obviously complicated, there is almost always a common detail: Most clients in significant debt trouble today would not be in that situations had they simply funded their lives by cashflow instead of credit.

And that may be the crux: a decade of low interest rates has fuelled habitual credit reliance by consumers. Two or three decades ago, it would have been unthinkable for people to hold the equivalent of $30,000 or $40,000 (or more) in credit card debt. Yet now that has crept into the Canadian psyche as just something one does.

(By the way, have you noticed the “Estimated Time To Pay” wording on your credit card statement? It is a calculation of how long it will take to pay off your credit card balance if only the monthly minimum payments are made. The record we’ve seen is 330 years and 10 months. Don’t forget, a credit card balance of as ‘little’ as $6,000 can take more than 40 years to pay off if only the minimum payments are made.)

A lot of credit card debt, of course, has in the last few years been shifted over to lower-interest lines of credit, usually unsecured. This Peter/Paul conundrum is interesting: we very often see examples where people have paid off their credit cards using available lines of credit, only to have their credit card balances swell back to where they were within a year or so.

Let me share a scenario of someone who is self employed, as it highlights how a debt problem can spiral out of control quickly. I met recently with a woman in her 50s who owns her own company that furnishes and decorates high-end businesses, like big law firms. Or at least it did. With big firms shrinking to meet reduced market demands and trimming costs, her business had dried up.

Her accountant brought her to me, and it was clear she had severely mismanaged her business and financial affairs, despite her accountant’s warnings. We see this all the time—small business owners are typically very good at what they do, but very poor at handling day-to-day administration.

Here are some specifics that show how misaligned her lifestyle and business expenses were with the actual cash she was earning:

• Owns a townhouse: mortgage $600,000, estimated value $650,000

• Mortgage payments: $3,600/mo

• CRA lien against house for personal income tax owing: $98,000

• She had previously refinanced her house to help fund her business

• She had a prior bankruptcy 15 yrs ago—discharged

• Leased car: $51,000 owing

• Credit card debt: $75,000

• Business loan (personally guaranteed with a high interest rate): $45,000

• Outstanding debts to suppliers: $80,000

• Business rent owing (seven months behind): $11,000

• Net self-employment income: $3,500 per month, or $42,000 per year

The CRA lien is the big problem here. She can’t sell or refinance her house with the existing lien unless she pays her back taxes, while in the meantime interest charges and penalties pile up.

Although this may seem hopeless, it is actually a straightforward personal bankruptcy scenario: She closes the business, any source deduction or HST owing is included in the personal bankruptcy filing, as are any personally guaranteed business debts. She walks away from her house and cannot be sued for any shortfall due to the creditor protection afforded by her bankruptcy. She will lose her house and business, but that almost certainly would have happened regardless.

I should point out that clients in this type of situation often insist on keeping their house, a reflection of the deep-seated Canadian devotion to home ownership, and it takes long and difficult conversations with family, friends and trusted advisors before they come around to the realization that they have to let go of their home.

Keep in mind that the above situation is very normal for us. This is something we see every week.

As stated earlier, the most troubling trend we see now is the flood of regular Canadians facing financial crisis. Households and individuals who are employed, have decent incomes, own homes and have done everything they feel they ‘should’ be doing now find themselves facing serious, if not insurmountable, debt problems. They are having to file insolvencies now, or will in the next few years.

There are possible alternatives to outright bankruptcy, of course. Often, if clients have serious debt problems but also decent incomes, they will attempt a consumer proposal to settle their debt legally through a licensed trustee. In effect, creditors agree to accept just a portion of what they’re owed (which is more than they might get if someone is forced into a personal bankruptcy situation). This allows people to keep their assets (house, vehicles, investments, cottage, etc.) while eliminating unsecured debt they would otherwise have little chance to pay off in the normal course of life. The credit impact in a proposal is easier than a bankruptcy, and one can rebuild credit in a few short years. It’s a growing option for debtors. In fact, about 50,000 Canadians file proposals every year, and that number is rising.

Increasingly, life has simply become too unaffordable for many. The temptation to spend is too great, and access to cheap debt too easy. When the gap between what people need or want, and what they can afford with their incomes becomes too great, credit is used to fill the gap. Interest kicks in, and the cycle begins. As credit card debt is shifted to readily available lines of credit, $5,000 becomes $15,000, and soon you’re facing a $50,000 or $100,000 debt problem. A person living at or below the median income range simply cannot handle this.

Unfortunately, that’s a lot more ‘normal’ than you think.

Source: MacLeans – Scott Terrio is an estate administrator at Cooper & Co. Ltd, a licensed insolvency trustee in Toronto. Follow him on Twitter at @CooperTrustee

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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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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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It won’t take much to drive Canadian borrowers over the edge, new study says

There are more than 700,000 Canadians who might be watching the next Bank of Canada decision very closely, because even a modest interest rate increase could push them over the financial edge.

A new study out Tuesday from credit agency TransUnion shows that of the 26 million credit-active Canadians in the country, 718,000 can’t absorb a 25-basis point increase or they won’t have enough cash flow to cover their debts. Raise rates one percentage point, something not likely to happen overnight, and 971,000 Canadians end up in a cash crunch.

The next interest rate announcement is not due until mid-October but the consensus among economists is there will not be a rate hike until the third quarter of 2017. That may be part of the problem, since consumers have come to expect rates will never go up and are now borrowing based on a prime lending rate of 2.7 per cent.

“I would say for five or six years interest rates have been so low, a lot of these consumers look okay because of the low rate environment. This is one of the things we are looking at,” said Jason Wang, director of research and industry analysis with Chicago-based TransUnion. “If everything changes and interest rates are higher, and they have to pay more on a monthly basis back to lenders, they may not be able to handle (an increase).”

The report looked at so-called super prime customers — the people with the best credit and scores in the 830-900 range — who make up the largest segment of the credit-holding population unable to absorb a small increase. Of super prime customers, TransUnion says a 25 basis point increase to interest rates would cause cash-flow trouble for 239,000. Only 101,000 Canadians borrowing with sub-prime ratings, in the range of 300-599, would face the same cash crunch under those circumstances.

Wang said the super-prime customers are far more leveraged and therefore more vulnerable to an interest rate increase. If rates rose one percentage point, 298,000 super-prime customers would face cash flow problems.

On average, credit-active Canadians carried 3.7 credit products, TransUnion said. The study focused on two major types of debt that carry variable rates, including lines of credit and variable-rate mortgages.

The message to consumers is to pay down debt before interest rates start to rise, while issuers need to look at their books.

“Take a look at their prime- and super-prime customers to see if they have a problem, because these are the people who will be surprised,”  Wang said. “We don’t want creditors to be surprised.”

Laurie Campbell, executive director of Credit Canada, said high quality customers have been building up debt because they’re attracted to low rates that never seem to rise.

“There is an assumption that those with better income and good (credit ratings) are in good financial shape,” Campbell said. “It’s not the case at all. We see people in our offices all the time that should be managing well that are not due to a number of factors. One is over extension, they’re biting off more than they can chew.”

Source: Financial Post Gary Marr | September 13, 2016 | Last Updated: Sep 13 8:43 PM ET

 

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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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Secured Credit Cards: Got bad credit? You can still get a credit card…

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Secured Credit Cards

If you have bad credit, one of the best things you can do to start fixing that situation is get a credit card. Sound backwards? A new line of credit that you manage well can do a lot to increase your credit rating. And, in situations involving travel and rental cars, having a credit card makes like that much easier. So, how do you go about getting one when the numbers say no?

Start with Your Bank

If you have a good relationship with a bank, there is a chance that they might approve you for a Secured Credit Card when others won?t. Most banks have credit card offers for current account holders right on their websites. Often, when you apply online for a regular unsecured card from your bank, you can receive an answer right away. Many, if you are not granted a regular card, will automatically offer a secured card instead.

Consider a Credit Union

Credit unions are also more likely than other sources to give those with blemished records a break. One other advantage is that, because they are member organizations, you may be able to get a card with a lower rate, as well.

Read the Fine Print

If you are unable to get a regular card, a secured card may be your only option. The amount that you deposit into the account will equal your credit limit. These cards will almost always have annual fees and higher interest rates than cards available to those with better credit. Make sure you are aware of all of the fees and rules before applying for the card. Some unscrupulous companies that target those with bad credit have monthly fees that, over the course of a year, add up to two to three times the annual fee for other cards.

Pay On-Time Always and Other Rules

Once you have a card, treat your agreement with the card company with the utmost respect. Do not charge over the limit. Make your payment on time every single month. It is best to pay off in full each month and not overuse the card. The percentage of your available credit that you are using affects your credit score, so, low utilization can raise it.

Next Steps

Whether it is secured or unsecured, the credit card you get with bad credit is not going to be the best deal but will help you with the credit repair process. Spend six months to one year using the card a bit each month and paying it off in full. Then, call and ask for a better offer. If you have a secured card, ask to be approved for one that is not secured. If you were able to get one without a security deposit, ask for a higher limit and a lower interest rate. Over time, you will get access to better and better deals and expand your financial opportunities. – See more at: www.keycreditrepair.com.

Source: Real Talk Boston

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