Credit Score 101 – A Refresher Course

We all know that we need to be careful with credit – because it’s easy to borrow money, and wind up owing as much, or more than we can pay. We all know what it feels like when there’s “too much month left at the end of the money”.

And there’s this vague fear of a negative impact on our credit history that can affect us in the future. The more we know about credit reporting, the more we can work to improve the way potential lenders see us, and then we can leverage a good report to get favourable terms when we borrow money.

What is a Credit Score?
In Canada, a credit score is assigned by one of the two large credit reporting agencies – Equifax or TransUnion. The score is a number between 300 and 900 (900 being perfect) that represents Credit-Report-illustrationthe aggregate of all of the information that the bureau has on file about us. Most interactions that you have with lenders, either positive (payments made on time) or negative (late payments, collections, bankruptcy) will affect our score. Anyone who has ever accessed any form of credit has a file with the credit bureaus. Potential lenders use your credit score, with your permission, to determine whether or not you qualify for credit, and sometimes they use it to set the terms of borrowing (interest rates, etc.).

Who Can Access My Credit Report?
Any lender can provide information about your loan, payments, etc. to the credit bureaus. You give them permission to do so in the agreement you sign when you begin to access credit with them. Any potential lender with your permission (usually in the application) can access your report and score. You can (and should) access your own credit report with both bureaus. Make sure that all of the information that they have on file is accurate.

By knowing your own credit score, you can demonstrate to potential lenders that you are a responsible borrower. You may be able to negotiate more favourable terms as a result.

If you’ve got questions about credit, or have found yourself in some trouble, contact Creditaid anytime online or by telephone at (204) 987-6890 or (877) 900-2659. We can help you take those important first steps toward a debt free life.

Second Time Around

Republished from the Winnipeg Free Press print edition June 6, 2015 B13

Hoyt and Summer knew home ownership wouldn’t be easy. After all, the former Money Makeover participants were told as much by a financial counsellor their first time around.

Phil Hossack / Winnipeg Free Press

In 2012, they graduated from university and were interested in jumping into the condominium market. Both having landed full-time jobs with good pensions, they believed home ownership would help them get ahead.

“We had been renting about five years,” said Hoyt, a civil servant in his early 30s. “We had a lot of debt, so we thought we could buy a condo, live there a few years, and after selling it, we could hopefully find some way to alleviate the debt we had.”

“Boy, were we wrong,” said Summer, an administrative worker in her late 20s.

At the time, the couple had about $21,000 in debt, largely the result of earning university degrees.

They did have some savings — about $17,000, including $11,000 from their parents for a down payment. Moreover, they had steady income, earning a combined $75,000 before taxes a year. Eventually, they purchased a renovated two-bedroom condo for about $187,000.

It didn’t take long before they realized it was more than they could handle.

“The debt just kept ballooning because we couldn’t keep up with the mortgage payments, the condo fees and everything else that comes along with it,” Hoyt said.

The expenses that hurt the most were large, unanticipated repairs: a sewer backup, burst water pipes and a leaky roof — to name a few. Soon their reserve fund was empty and they were paying out of pocket.

“We had rose-coloured glasses on and seeing what friends were doing with their lives, we thought ‘this is something we should be doing, too’ not realizing we were not financially in a place to do it,” Summer said.

So late last year, they sold at a $20,000 loss and were relieved to be renting again. Now Summer and Hoyt owe about $42,000, including a $6,000 no-interest loan from their parents, and they have almost no savings.

Still, they have hope.

They earn more than before: more than $90,000 combined a year. And they are determined to get out of debt as soon as possible, particularly since they want to return to school so they can upgrade their career options and earn more money so they can become homeowners again.

“We are really a cautionary tale for others like us thinking of doing the same thing,” she said.

Brian Denysuik is a local credit counsellor and a registered insolvency counsellor at the for-profit debt-management agency Creditaid in Winnipeg.

He said many first-time buyers find themselves in financial trouble because — like Summer and Hoyt — they underestimate or even overlook the costs of ownership, particularly with respect to condominiums.

“The repairs and the (loss of the) reserve fund frightened them so understandably they decided to cut their losses.”

Now, Hoyt and Summer must become debt-free to move forward. Yet while they have been trying to track expenses and make regular debt payments far above the minimum requirements, Denysuik said they will have to bear down on the budgeting process to make meaningful progress.

“I asked them if they are working from a spending plan and tracking their expenses and the answer was ‘we have a hard time keeping up after a week or so.’ ”

But if they were tracking costs, they would realize they have more free cash flow than they think.

“Three years ago, they had a combined gross income of $75,000, but today they have a combined gross income of $94,446, an increase of 26 per cent,” he said, adding their take-home pay has increased to $4,640 from $4,088 a month.

While their debt has doubled, they do have the cash flow to pay it down faster than their current pace.

In 2012, their discretionary spending was $850 a month when they were advised to cut costs if they decided to buy a home.

Today, they’re spending more than $950 a month on entertainment, coffee, clothing and dining out even though they are focused more on debt reduction than they were before.

“At this point, even if they earned an extra $20,000 a year without changing their habits, they will just keep spending more.”

The upside here is they make enough money to become debt-free in less than five years without taking more drastic measures such as a consumer proposal or bankruptcy. But they must become dedicated budgeters to make it happen.

Hoyt and Summer have to closely track their expenses to understand their true cost of living. This is the only way to find where they can cut spending to increase cash available for debt payments while building up emergency savings so they’re not forced to go back into debt when things go sideways.

Already, they’ve done some good work, paying more than $1,000 a month on debt while saving $165 a month for emergencies. Still, they could do better because about $466 a month of income is unaccounted for in the budget.

Moreover, they could increase the effectiveness of their efforts using the ‘avalanche method’ of debt repayment — something Summer is already doing. This involves paying the minimum amount on the lowest interest debts while making the largest payments against the highest interest debts.

“In this respect, Hoyt should look at reducing his line-of-credit payments — at seven per cent — from $300 a month to $100 and increase payments on his credit card payment — at 20 per cent — to $400 a month from $200,” Denysuik said.

“This way they can have their unsecured debt paid off in 40 months with another five months to repay parents.”

Yet with a few more tweaks, they could be out of debt even faster.

“If they reduced their discretionary spending by $400 a month, increasing emergency savings from $160 to $200 and pushing $300 more to debt repayment, they can be out of debt in 30 months,” he said.

Another benefit of this strategy is their cash flow would increase to more than $500 a month from $466 a month simply because their money is being managed more efficiently. This extra cash could be used to save for a home, tuition or pay debt faster.

“All of this is dependent on monthly tracking of expenses and making adjustments,” he said.”That means keeping all receipts and once a month sitting down together and sorting the bills and adding up each category.”

And it need not be a grim task either, he said.

“Make it a date night at home where you cook supper, have a little wine and summarize the tracking and compare it to plan.”
— — —
Summer and Hoyt’s finances:

INCOME:
Summer: $49,500 ($2,340 net a month)
Hoyt: $43,900 ($2,300 net a month)
MONTHLY EXPENSES: $4,173
DEBTS:
Summer line of credit: $15,000 at 3.5 per cent
Hoyt line of credit: $10,500 at 7 per cent
Summer credit card: $7,070 at 19.99 per cent
Hoyt credit card: $4,300 at 19.99 per cent
Loan from parents: $6,000
ASSETS:
Summer TFSA: $90
Hoyt RRSP: $1,300
Savings: $800
NET WORTH: – 40,680

Do I Need Credit Counselling?

Do-I-Need-Credit-Counselling-Apr-1

Isn’t everyone in debt?

Well, in 21st Century Canada, it might seem that way. Canadians owe a greater portion of their earnings to creditors today than ever before, and even with low interest rates are making steep payments every month just to maintain their debts. When seemingly everyone owes money, how do you know it’s time to see a credit counsellor?

First and foremost, if you don’t know your financial situation, you need to see a counsellor. It’s often easier to hide your head in the sand when it comes to debt problems, but it’s certainly not a long-term solution. If you’re ignoring a debt problem, it’s getting worse.

If one or more of your debts has progressed to collections, and you aren’t able to make the payment, you have a debt problem.

If you are borrowing from one source of credit to pay another, you need to see a counsellor.

If your credit payments (not including your mortgage) exceed 20% of your net income, you are in danger.

If you’re not able to save for emergencies, or put money away for retirement, you could benefit from credit counselling.

If you aren’t able to sleep comfortably at night, secure in the knowledge that your household spending is under control and you have a plan to pay your overall debt load, then you need to contact Creditaid.

Creditaid is a licensed and bonded credit counselling agency that has been proudly serving Winnipeg since 1992. If any of the above scenarios apply to your life, contact us today for a free appointment with a credit counsellor, to help you take stock of your situation and access some of the many tools at our disposal to help you on your journey to financial security.

Paper or Plastic or Cloud? The Evolving Concept of Money

dollar-signYou need only to look at the recent demise of the penny, or see the “wave your card here” payment option at the supermarket to know that the way that we think of and use money is changing.

In ancient times, humans would barter objects or labour directly. A farmer might give his neighbour two chickens in exchange for a bag of flour, or might help build a fence and be rewarded with a sack of carrots.

At its core level, money is a substitute for human labour or resources, traded to someone in exchange for “payment”. This payment can then be used to obtain the things you need or want from a third party, not related to the first.

In the past we used gold and other precious metals to represent the value of our labour and goods, but switched to a system of currency consisting of minted coins and printed paper. In the 20th century, cheques and bank drafts simplified purchasing, and in the 1950s, credit cards were invented, to allow us to access money we hadn’t yet earned, in exchange for a “borrowing fee”.

Today, money exists in a number of forms. We still have “hard currency”, or cash, but its use is on the decline. The digital revolution has brought us more options. As more and more purchases are being made at a distance, instant transfer of money via credit cards and money transfer services have become part of the landscape.

At the end of the day, no matter how you spend your money, simple rules of budgeting must apply to keep your finances in balance. With so many ways to spend money that don’t involve any kind of currency, it’s easy to forget to budget. This is one of the ways that people wind up in financial trouble.

If you find your credit card and loan payments are making it hard to budget your money, contact Creditaid for a confidential assessment of your financial situation. We have tools that can help!

Living as a Couple – Time for the Talk

Your relationship is going well, and you take the big step to move in together. However, reality soon comes crashing down. Before you know it, the honeymoon is over, and you’re disagreeing about every little aspect of your lives together.

One of the biggest sticking points for couples is finances. You may find that you each hold completely different views about the importance of budgeting, or when you do budget, you disagree on what is or is not a priority. These are the times that will try your relationship, but the good news is, you can get through it and reach an accord.

First of all, there is no way around it – you need to be honest with each other. Discuss all your assets and debts, so there are no unpleasant surprises. You then need to decide whether to share financial responsibilities and to what degree. One person may be bringing a lot more debt to the relationship, which is why it is important to have this conversation early in the relationship.

Make sure to discuss your individual credit history, too. Your ability to borrow as a couple will be greatly impacted by your past spending. Don’t panic if your partner has taken out a lot of credit in the past; this is your opportunity as a couple to explore options for getting to a place of financial stability. Talk about setting a budget and goals for clearing debt, and decide on a ratio of responsibility for that debt.

While it is important that both of you contribute financially to your budget and the paying off of debts, you should also play to your strengths. The person who is better at managing monthly bills should take care of that side of your finances; however, it is important that both people in the relationship share the overall responsibility of maintaining the budget.

Compromise and communication are key to a strong financial relationship so make sure you discuss and come to an agreement on where your money is going and when. A relationship takes work, but by having this honest conversation early on and staying on track with budgeting and spending, you may find that your relationship is stronger for it.

Get Closer to Your Goals with Multiple Savings Accounts

Have you ever tried to perform mental gymnastics with your finances? It is no mean feat, and you are quite likely to forget at least one important payment. Creating a budget is one thing, but ensuring that all the funds in your bank account go where they should is not so easy. When you created your budget, you probably divided all your payments into categories. If you didn’t, then now is the ideal time to create a system that is both efficient and easy to manage. This will make life so much easier, once you split your payments across multiple accounts.

You would imagine that trying to manage multiple bank accounts would be a nightmare. However, nothing could be further from the truth. Separating your monthly expenses and savings across multiple accounts will help you focus on your budgets and goals. There are cost effective accounts like Tangerine Bank where you can have multiple accounts and even name the account the same as your budget category.

If you have financial goals that you are determined to achieve, focus on each one individually. Create an account where you can save towards specific goals. Once you have reached your target, you can use that account to work on your next goal. Keep all your regular payments in one account, where you can allocate a set amount each month, with the security of knowing that you will not overdraw. Next, create an account for your irregular payments. This account should allow for enough breathing room to accommodate ad hoc payments.

Should you be lucky enough to consistently have cash flow to spare, you may want to set up an account for luxuries. Filter your spare cash flow into this account, whenever you can. Once you have been using your multiple accounts for a while, you will find that management your finances becomes much less of a chore.

Empowering the Independent Woman: Take Control of your Personal Finances

Gail Vaz- Oxlade has a message for women everywhere – be an “Island” before becoming a “Peninsula”. The tough-talking money expert and host of popular reality TV shows such as Til Debt Do Us Part and Princess maintains that all women should be financially independent , even in marriage rather than expecting a partner to become their financial safety net.

In her latest book, It’s Your Money: Becoming a Woman of Independent Means (HarperCollinsCanada, $21.99), Vaz-Oxlade argues that women have unique challenges when it comes to managing money such as motherhood, divorce, widowhood, disability and caring for the elderly. Instead of relying on others, whether it be a partner, parent or financial planner, women should take action to understand and plan around their unique needs.

The first step of taking control is keeping track of where money is spent. Vaz-Oxlade suggests keeping receipts and entering expenses into a journal or spreadsheet and to distinguish clearly between the wants and the needs. Read the full article from the Winnipeg Free Press on Gail’s financial tips for women here.

Credit Aid is a proud sponsor of “You and Your Money with Gail Vaz-Oxlade” taking place in Winnipeg on February 9th, 2012. Tickets are $45 and can be purchased at www.youandyourdollar.com or by calling 254-2595.

Tips to Help Kids Understand Debt

In order for children to fully understand finances and how money “works,” they have to learn about debt. The age of your child will determine how you define debt so they can understand.

Make sure you use terms and examples that they are already familiar with.

You can begin with the concept of borrowing something such as a toy from a friend. Explain the need to return the toy to its owner. And if the toy can’t be returned in its original condition then it needs to be replaced by a similar item of equal value. Your child should be able to understand that until that item is replaced, paid for, he is in debt to the person who owned the item.

For the “tween” set you can use real money items and examples. Set up a scenario where your child wants something, a new bicycle, for instance. Write down and discuss the amount of money the bike costs, the amount of money your child has, the amount of money he earns through allowance, or anticipates receiving for a gift, etc.

Talk about whether or not he can “afford” the bike right now, and if he can pay it off within a reasonable amount of time. This discussion will include installment payments where instead of paying back the “loan” with all of their allowance each week, they pay smaller amounts so as to keep some money for their usual “living expenses.” It’s important to work financial terms into the conversation as soon as you child is able to understand them.

Then, actually carry out a transaction. Keep it written down; sign a contract, have them make payments and even set up an amortization schedule so they can see how interest works. Going through this process will give your child an excellent opportunity to learn about personal finances.

New Year-New Beginnings – Financial goals

The beginning of a new year is a time to start fresh, make some changes and set some goals.  Now is as good a time as any to evaluate your income, expenses and overall financial health and set some goals.

Here are a few things to look at when it comes to setting financial goals:

Retirement: Depending on your age, retirement can seem like a lifetime away, or it can be right around the corner. No matter your age, now is the time to look at what is available for retirement income, and if it is deemed to be not enough, now is the time to start saving towards that goal.
Insurance: get out your policies, health, life, auto, property, etc. Talk to your agent to see if you are appropriately covered.

Debt Reduction:Consolidate current debt and don’t create more- that means cutting up the credit cards and gaining control of spending.

Savings: Besides controlling spending, you’ll want to amass some savings; typically the interest rate on investments is considerably lower than the interest rate on your line of debt so by saving rather than paying down debt, you’re actually losing money. That’s where you need to strike a balance: you need to invest some, but at the same time reduce the debt.

Additional Income:Think about the possibility of getting a second part time job. If you’re living comfortably on your current income, the income from a second job can go directly on debt or mortgage or into retirement or another fund for education or a trip or an emergency.

Once you set your financial goals, it’s good to revisit them every few months. Six months from you will be motivated to continue your financial plan when you see how well it’s working for you!