We at InCharge Canada have been answering a lot of questions recently in regard to Debt Settlement Organizations, so we thought we would put together some articles to provide our viewpoint on these organizations and their business.  So here goes …

First, we’re sure that you’ve seen or heard some of their advertisements, and we’ll admit that their claims sound pretty good.  Here are some of the claims you’ve probably heard:

• You’ll be able to pay only a small fraction of the debt, and forget about the rest.
• Doing so will have a minimal effect on your Credit Report.
• All creditors are willing to accept debt settlement offers.  (This is implied, but not stated directly.)
• The programs offered by Debt Settlement Organizations are “Federal Government Programs”.

So let’s take a closer look at these claims.  In this post, we’ll look at the first claim:  You’ll pay off your debt “for pennies on the dollar”.  First, you should understand that Debt Settlement is the process of paying off less than 100% of what is owed to a creditor or collection agency.  Most creditors are totally unwilling to accept regular monthly payments to do this – They want a big chunk of money, ASAP, in return for forgetting about the rest.  If you think that you’re going to be sending a regular monthly payment directly to each of your creditors, you are wrong!

There are some cases where Debt Settlement is a very good option, but these are generally cases where the debtor is able to come up with a reasonable portion of their debt on short notice.  This is often done by selling an asset, but more often, it occurs when a third party (usually a relative, parents being the most common example) puts up a large chunk of money.  So the first question you should ask yourself is this:  Would I be able to come up with a substantial sum of money quickly, and if so, where would I get that money from?

But what about those people who are NOT able to come up with a sum of money quickly?  How does the Debt Settlement Organization assist them?  Well, in this case, the debtor is advised to stop making payments to all creditors immediately.  The money saved by doing so is then paid into an account.  When a sufficient amount of money is sitting in the account, then the DSO will begin negotiating with creditors, to see what amount of money they will find acceptable to settle the debt.

While the money is accumulating in the account, the DSO’s fees will be billed from this account.  We call this “front-loading” of fees.  Essentially, the DSO will be billing their client for services before any services are delivered.  (In a future post, we will examine how this practice was banned in the USA – the home country for many of the DSOs – in the summer of 2010.  So DSOs in Canada are engaging in a practice that is now illegal in their home country.  And as for the level of fees, one article on MSN Money which is relatively sympathetic to Debt Settlements in some circumstances contains the following quote regarding DSO fees:  “Their fee is exorbitant.”  In Canada, the Credit Counselling Society of British Columbia has provided an Overview of Information about one DSO, Cambridge Life Solutions and sums up their fees with the following quote:  “Cambridge charges astronomical fees which consume over 70% of many of their clients’ monthly payments for the first 10 months of their programs.”

In our next posting, we will look at the process of stopping making payments to creditors upon Debt Settlement program entry.  We will look at how this affects the Credit Report, how long it stays affected (longer than you would think!), and the probable reaction from creditors to stopping payments.

In our previous blog entry on Credit Reports, we indicated that we would take a look at how to get your own Credit Report from the two Credit Bureaus, Equifax and TransUnion.  So let’s have a look at that now …

First, there are several options for getting your Credit Report.  Some of these will be free, while another (the on-line option) will have a cost.  In a future entry, we will take a look at what information can be found on the report, but if you access your information in various ways, including the paid-for version, you will see that the paid-for version will look nicer and be easier to read.  All the same information will be found on the free version, but it will just not look as nice.  (The free version will be in black and white, while the paid-for version may include colours and other elements to assist in legibility, such as graphics.)

So, on to the methods of getting your report, we have …

On-Line

This will have a cost, but it will be the simplest and fastest method.  You will have your Credit Report on your computer screen within a matter of minutes.  Just click on the following links –

Equifax

TransUnion

In both cases, you click on the large button (“Get Started” for Equifax, “Click Here” for TransUnion), then provide the required information, and you are on your way.  Note that Equifax offers a combination of the Credit Report & Score for $23.95, while TransUnion offers “Credit Monitoring Unlimited” for $14.95 per month.

Through the Mail

You can order your report by mail or phone, and the report will be mailed out to you for free.  It will take one to two weeks to receive your report.  When you order, you will need to include photocopies of two pieces of ID (one a photo ID) to prove your identity.  Both credit bureaus have provided downloadable copies of their order forms, and the links to these forms are below –

Equifax

TransUnion

The mailing addresses (and also the fax numbers) are included on the order forms.

 In Person

For those who live in or close to the Greater Toronto Area, you may wish to learn that both Equifax and TransUnion have a walk-in office, where you can go to receive your free credit report.  Take two pieces of identification, and you will have your report within 5-10 minutes.  Here are the locations:

Equifax Canada

Lower Concourse, Xerox Tower (north-west corner of Yonge St. & Finch Ave.)

The Equifax office is the very last office in the north end of the concourse.

TransUnion Canada

3115 Harvester Road, Suite 201

Burlington, ON

(1 block east of Guelph Line, TransUnion is in the building on the north-east corner of South Service Road and Harvester Road.  There is no exterior signage for TransUnion on the building, as of August 2011.)

In our next blog entry, we will take a look at what you will find on these reports, and gain an understanding of what information is the most important.

At InCharge Canada, we receive a lot of inquiries from our clients and also from members of the general public on a variety of subjects relating to people’s personal finances.  One constant source of interest is the topic of Credit Reports and Credit Scores, so we thought that it would be useful for us to run a series of entries dealing with this subject.  As you can see from the title of this entry, this is your Introduction to the series on Credit Reports and Credit Scores.  So, let’s get started …

First, just what is your Credit Report?  Your Report is a collection of your recent Credit History.  You will have a Credit History if you have accessed any form of credit (a loan, a credit card, a line of credit, and so on), and the credit grantor (a bank, a credit card company, or any other business which gives credit) reports that information to a Credit Reporting Agency.

A Credit Reporting Agency, more commonly known as a Credit Bureau, is an organization which collects information about you, regarding your usage of credit.  This information typically includes some or all of the following: 

• Your requests for new credit
• Your payment history on the accounts which report to the Credit Bureau
• Balances owing on these accounts.

Note that it is only accounts that are being reported to the Credit Bureaus which affect your Credit Report.  You may owe money to organizations which don’t report to any Credit Bureau.  One common example for many is the taxman, which does not report.  (If you owe money to Canada Revenue Agency, you will quickly learn that CRA doesn’t see the need to damage your credit history – CRA has much more painful ways to ensure that you pay your taxes!)

Your Credit Report is usually checked by creditors when you apply for new credit.  This includes situations such as applying for a mortgage (or renewing an existing mortgage), getting a car loan, and getting a credit card.  If your credit history is poor, you may find that your application will be rejected, or if it is accepted, it is with the provision that a higher interest rate will be charged to offset the perceived risk.

Other than creditors checking your Credit Report to process new credit applications, and updating their records where credit has been granted in the past, access to your Report is restricted to limited purposes, such as the rental of a home and applications for employment or insurance.  In Ontario, the specific permitted uses of a Credit Report are defined by the Ontario Consumer Reporting Act. 

The two major credit bureaus operating in Canada are Equifax and TransUnion, and if you have a credit history, it is likely that both of these organizations have some information on you.  You have a right to see your own Credit Report, and we recommend that you check with both of the above organizations at least once a year to see what they are reporting about you.  (Note that there is a third credit bureau, Experian, which operates in the United States but not in Canada.  If you have ever heard about your “three” credit reports and scores, this is for Americans – in Canada, there are only two.) 

In future articles, we will take a look at how to get your Credit Reports from both of these credit bureaus.  Following that, we will look at what information you will find on your reports, what it means for you, and what you can do about correcting wrong information and about improving your report.

The Bank of Montreal released a survey the day before yesterday, and the title – Canadians Unprepared Financially for a “Rainy Day” – says it all.  According to the survey, which was conducted by Leger Marketing during the first week of July, a substantial proportion of the Canadian public is not ready to face the proverbial “rainy day” when it comes to their finances. 

 Within the sample group, over 40 percent of the respondents indicated that they are either unable, or are unsure about their ability, to handle their financial obligations in the event of an emergency.  The news release did not define what constitutes an “emergency”, and it is quite likely that this definition varies with the individual or family involved.  For some, “emergency” would refer to major life-changing events such as job loss, marital breakdown, illnesses and deaths.  For others, “emergency” means any unexpected large expense, and this includes a lot of things that people should have seen coming, such as necessary car maintenance and repairs.  Without a more-exact definition of just what is meant by “emergency”, it’s difficult to determine whether we should be merely shocked or totally horrified by the 40% statistic.

 The survey also provided reasons why Canadians say they are unable to properly prepare for the “rainy day”.  Here are the two main reasons given by the survey which prevent Canadians from saving more:

• Debt, including both unsecured (credit cards, lines of credit, etc.) and secured debt, such as mortgages.  This was cited by 47% of the sample group.
• “Everyday expenses”.  This was cited by 41% of the group.

Both of these reasons are particularly troubling –  the first,  because it indicates the past propensity of many Canadians to take on levels of debt that are disproportionate to their incomes; and the second, because it indicates an insufficient ability to budget for expenses in a way that leaves them manageable, given a certain level of income.

 There is one final finding from the survey that is worth looking at:  One-quarter of the sample group indicate that they have less than three months of emergency savings.  The news release includes a quote from Lynne Kilpatrick, Senior Vice President at Bank of Montreal.  She says, “A general rule of thumb is to have an emergency fund set aside that is equal to three to six months of your income to use for unexpected household expenses.”

We understand that many people like to have “rules of thumb” provided for them, to give them an idea of what they should be doing.  However, in our opinion, people should spend some time thinking about what level of emergency savings is appropriate for their own particular circumstances.  Some of you may find that three months’ savings is actually too much, and some of you may find that six months’ savings is too little.  This determination should be made based on your own life and your own situation.

Here are a few questions you may wish to ask yourself, to determine whether your level of emergency savings is too little, too much, or just right.

• How stable is your employment?  (How sure are you that you’ll still have that job a year from now?)
• How’s your health, and that of your family?  Are there any expensive surprises in the pipeline here?
• Look at the things you own – How much do you think they could cost you in the short- to mid-term future?  (A 10-year old car is probably going to create an “unexpected” expense sooner than a 1-year-old car, for example.)
• What other obligations do you have in your life that are periodically going to require substantial sums of money?  (We suggest making a list of these.)

If you find that your savings (and overall preparation) for emergencies are minimal or non-existent, or if you are already struggling with overwhelming debts and bills, then don’t hesitate to contact the experienced and professional counsellors at InCharge Canada today.  We can provide the counselling, education, and resources you need to regain your financial independence. Call 416-637-6820 or visit the InCharge Canada website for more information.

In a previous article, we looked at and defined Good Debt, Bad Debt, and Ugly Debt.  When we concluded, our definition of Ugly Debt mentioned that even Good Debt has the potential to turn Ugly if the payments can’t be made on time.

For most people, the number one “Good Debt” that people will encounter in their lives is the mortgage on their home.  Unfortunately, we as credit counsellors have seen too many people with too much mortgage.  The mortgage payment, plus the other expenses (property taxes, utilities, repairs & maintenance, etc.) associated with owning a home, vacuum away too much of the homeowners’ available money.  As a result, we have seen these people running up large balances on their credit cards to pay for all of their other expenses, like groceries and gasoline.  By the time they come to us for assistance, they are struggling with significant debt loads in other areas, but the main problem goes back to the crippling mortgage.

We’re sure that you’ve all heard the old expression that “an ounce of prevention is worth a pound of cure”, and it was never more true than in cases like this.  We have definitely found that people who spend some time thinking about their home purchase and mortgage beforehand are much less likely to wind up in a situation where they require our assistance later on.  So, here are some questions that we’d like to see all prospective home-buyers ask themselves before they start looking for a lender and a real-estate agent:

• How much are you really able to spend for a home?  And the question following this is:  How much of a mortgage will you be able to carry?
• What will the monthly payment be on this mortgage?  (We’ll get to Mortgage Calculators soon …)
• How much of a down payment will you be able to make?  Remember that more money down equals less of a mortgage to repay.
• Where is the down payment going to come from?  If the answer is “from my savings”, that’s a good answer.  If it’s “I’m going to take a cash advance on some form of credit”, that’s not a good idea!
• If the down payment is coming out of your RRSP, you know you’ve got to repay that money back into the RRSP, right?  Have those payments been factored into your budget?
• Have you gotten yourself educated about mortgages?  Just as one example, are you aware that you can potentially save tens of thousands of dollars in interest over the life of a mortgage, simply by varying your payment schedule?  We have tried a simple experiment, using the Mortgage Qualifier Calculator linked below, with the pre-populated data given by the website.  By varying the Payment Frequency from Monthly to Accelerated Weekly, and making no other changes whatsoever, we found that over a 25-year period, the savings in unpaid interest amounted to over $24,000!
• What does your Credit Report look like?  Will this affect the terms you will be offered when shopping for a mortgage?  If it will affect this negatively, is there anything you can do to fix the Credit Report before you start shopping?

We recommend that, before you start looking for a home, you should visit the website of the Financial Consumer Agency of Canada, a federal regulatory agency whose mission is to protect and inform consumers of financial products and services.  On their website, you will find a very good Mortgage Qualifier Calculator, which will give you a good idea of how much of a mortgage you may be approved for.  It will also give you an explanation (with examples) of terms such as Gross Debt Service Ratio and Total Debt Service Ratio, which are used in mortgage lending.

In closing, we would also like to point out that at the present time, interest rates for mortgages are at or near historic lows, with little room to move much lower.  It is always possible that at some time in the future, interest rates may move higher.  Some financial experts have recommended stress-testing mortgages (especially any kind of variable-rate mortgages), by running the same data through a mortgage calculator while increasing the interest rate by 1 or two percentage points above today’s level.  Take a good hard look at the resulting monthly mortgage payment, and see if it would fit comfortably into your household budget.  If it would, fine!  If not … how would you deal with that situation?

If you are in a situation where you are already struggling with your finances due to over-size mortgage payments or other housing-related expenses, then don’t hesitate to contact the experienced and professional counsellors at InCharge Canada today.  We can provide the counselling, education, and resources you need to regain your financial independence. Call 416-637-6820 or visit the InCharge Canada website for more information.

No, this post will have nothing to do with old spaghetti westerns or Clint Eastwood.  Today, we’re going to look at “good debt”, “bad debt”, and “ugly debt”.  You’ve probably heard various commentators mentioning “good debt” and “bad debt”, but often “good” isn’t clearly defined, so we thought we would offer up our thoughts on this topic …

Let’s start with Good Debt.  Usually, when commentators talk about this, they’re referring to one of two things – First, when businesses borrow money to expand their business, and Second, when people take out a mortgage to buy a home.  The former example may be the easiest case to understand, in terms of debt being a good thing:  A business borrows money, spends that money on something (a factory, new machinery, etc.) that will produce income in the future, and then repays the debt over time with the income from that investment, and keeps any additional money earned as profit.  If we assume that the money earned from the investment in any year is greater than the debt repayment in that year, then borrowing money clearly makes sense.  It is “Good” Debt.

If we look at the second case, where money has been borrowed to buy a home, there is no immediate cash flow coming in to offset the monthly mortgage payment.  (There may be a capital gain when the home is ultimately sold, but as we can see in the United States in the last few years, where some recent home-purchases are “underwater” on homes that have lost value since their purchase, there is no guarantee of profit.)  However, even if housing prices do not increase, the homeowner (and mortgage-payer) has a clear benefit as a result of incurring this debt – He or she isn’t living on a park bench!

So here’s what we can say about Good Debt:  The debtor owes money and has to make repayments, but the debtor is also receiving an ongoing benefit (an income stream, a place to live, a vehicle to drive to work, etc.).  If the value of the benefit is equal to or greater than the ongoing debt repayments, then the debt is Good Debt.

Now let’s turn it around and look at the opposite, Bad Debt.  Let’s say that someone had a great vacation to a sunny Caribbean resort back in the winter, and put the bill on their credit card.  Assuming that the debt hasn’t been repaid in full, there is still a monthly debt repayment to be made.  So what is the current benefit of having that debt?  The tan has faded, the souvenirs have been lost or put away … and there is NO present benefit.  And here’s our definition of Bad Debt – If the ongoing debt repayments are greater than the value of any benefit presently received (or if there is no benefit at all), then the debt is Bad Debt.

We can use the above definitions to assess different debts, to determine whether they are “good debt” or “bad debt”.  Let’s try Student Loan debt as an example.  If a student goes to university, gets a decent education, and as a result of that education, is able to get a better job with a better income, and over the course of a lifetime is able to enjoy a better career, can we all agree that the debt is most likely Good Debt?  And conversely, if a student loads up on student loans, majors in Partying, and drops out without graduating and ends up working in a series of “McJobs”, can we call that Good Debt?

Finally, we have Ugly Debt.  Debt can be either Good or Bad, but it turns Ugly as soon as payments can no longer be made comfortably.  And anybody who has ever been in this situation will understand this instantly.  It doesn’t matter that the loan was taken to buy a reasonably-priced house in an excellent part of town; if you can’t make this month’s mortgage payment, you have a serious problem on your hands – and you know it!

So there we have the Good, the Bad, and the Ugly of debt.  If you find that you are in a situation where your debts are trending toward the latter two categories, then don’t hesitate to contact the experienced and professional counsellors at InCharge Canada today.  We can provide the counselling, education, and resources you need to regain your financial independence. Call 416-637-6820 or visit the InCharge Canada website for more information.

Today is Friday, and for many people, that means that It’s Payday!  For most of us, that’s a very good thing … but for some people, today is “Payday Loan Repayment Day”, and that’s not a very good thing at all.  We’re going to take a look at the topic of payday loans, and learn a bit more about why they’re not very good for our finances …

First, we’re sure that you’ve noticed the ever-expanding network of payday lenders, which nowadays can generally be found in almost every neighbourhood of every city and town.  Some people still have the misconception that payday lenders are only found in the poorer neighbourhoods, but if you have a look around, you’ll probably be able to find a payday lender somewhere near you.  Canada is clearly moving toward the point where the U.S. is now, with payday lenders virtually everywhere.  It has been estimated that, in the U.S., there are more payday lenders than the total of McDonalds and Starbucks combined!

For those of you who may be unaware of how payday loans work, here’s a brief explanation:  Payday loans are short-term loans that you promise to pay back from your next paycheque.  These are commonly used by people who have extremely tight budgets, or who have an urgent need for cash now.  For example, payday is next week, but the car needs to be repaired now.  So, off people go to their local payday lender.  The lender will ask you to give either a post-dated cheque or to authorize a direct withdrawal from your bank account, for the balance of the loan plus the interest charges and fees.  And it is these items that make payday loans so dangerous.

Here is a list, compiled by the Financial Consumer Agency of Canada, of interest and fees that may be charged by payday lenders:

• Administration fee / Processing fee / Convenience charges / Verification fee
• Broker’s fee
• Collection fees
• Early repayment fee
• Initial or one-time set-up fee
• Loan repayment fee / First-party cheque-cashing fee
• Locate fee
• Return fee / NSF fee
• Roll-over fee / Renewal fee / Finance charge / Additional charge / Extension fee

In addition, if you accept the electronic cards offered by some payday lenders (which can be used like a debit card), you will encounter still more fees, including:

• Issuing fees
• Reloading fees
• Fees for each electronic transaction made with the card

For more information on payday loans, you may wish to read the booklet “The Cost of Payday Loans” published by the Financial Consumer Agency of Canada.  It can be found here.  Additional information on the wider issue of payday loans can also be found here.

If you are dealing with payday loan debt, or if any of your debts are becoming overwhelming, then don’t hesitate to contact the experienced and professional counsellors at InCharge Canada today.  We can provide the counselling, education, and resources you need to regain your financial independence. Call 416-637-6820 or visit the InCharge Canada website for more information.

In a previous blog article dealing with the reasons why people are overwhelmed with debt, we raised the issue of “irregular” expenses.  At that time, we mentioned that many people prefer to call these expenses “unexpected”, rather than irregular.  What they mean by this is that these expenses (take car repairs as an example) are not as predictable as the phone bill or buying gasoline – they don’t occur every month, and are thus “irregular” expenses.

We made the point at that time that “irregular” doesn’t mean “unexpected”, or at least, it shouldn’t mean that.  We recommended that people not be caught off-guard by these types of expenses, and provided the classic advice about having a rainy-day fund for those times when life happens.

However, we wouldn’t want to leave the impression that all irregular expenses are “unexpected”, when in fact, some irregular expenses are just far enough away to ignore … which leads us to the title of this article.  Today, in Toronto, it’s 28 degrees and sunny, with 40% humidity … yes, it’s July!  And if you’ve got a calendar, it’ll take you no time at all to realize that five months from today is Boxing Day – when some consumers put the finishing touches on a debt burden that will follow them into the New Year and beyond.

Now, we imagine that on a day like today, none of you are spending much time thinking about Christmas … or snow blowers … or mid-winter vacations to warm climates … or a lot of other stuff that’s far away.  It’s human nature to focus on the near and ignore the far, but you should understand that when it comes to your finances, ignoring the far comes with a cost involved.  And the cost – well, you can ask any credit counsellor about the people who contact us in January and February and tell us about their credit card balances, and how they got to be so high, and how they’re ever going to be able to pay them off.

But it doesn’t have to be this way, and I think we can all recognize that.  This is one of those times when the old adage “an ounce of prevention is worth a pound of cure” is perfectly appropriate.  And the ounce of preparation comes down to one word – prepare.  So when you’re creating a budget that really works for you, take some time to think about all those “irregular” expenses that we should all know are coming – the birthdays, the holidays, the vacations, and so on.  And prepare for these – put some money aside now, and when the weatherman stops talking about “humidex” and starts using “wind chill”, you’ll be ready for … five months from today.

If you are struggling under large amounts of debt, then a credit counsellor can examine your financial history and spending habits.  One of the functions of a credit counsellor is to give you a clearer picture of how you accumulated such debt, and provide tips on how to avoid the same situation in the future.

We would like to take this opportunity to address the myth that all clients of credit counselling are chronic overspenders – that they are, in effect, people who have “done it to themselves”.  Very early on in the first counselling session, the counsellor will ask the client to describe, in their own words, just how they came to be in their present situation.  Every non-profit credit counselling service tracks these statistics (often termed “Root Cause”).  At InCharge Canada, we have found that a majority of our clients attribute their current situation to income-reducing events beyond their control.  The “Big Three” of income reducing events are as follows:

• Job loss
• Marital breakdown (divorce, separation)
• Illness, injury, or death of an income-earner in the household

The common element of the Big Three above is, of course, that the income decreases.  But, as should be obvious to all, income reduction doesn’t mean that any of your expenses dropped!  The rent or mortgage doesn’t change, nor does the car payment, the price of groceries, gasoline, clothes, and so on.  And so many people try to “bridge the gap” with their credit cards and lines of credit, and if that gap is wide enough … they’re in trouble.

But it is also true that, even without having to deal with adversity, there are people who are trapped in some of the various pitfalls of financial life.  Here are three examples for you to think about:

• Credit Cards.  Credit cards make it easy for people to buy items they need or want, but are unable to pay cash for.  Most people start off in a financially-responsible manner – paying off balances in full every month, and staying within spending limits – but over time, it can become easier to forget good credit practices.  Before they know it, some consumers have balances which, after interest is added on, may take years to pay off.

• Not Budgeting.  Creating and following a monthly budget is the best way to reduce the risk of not matching income to expenses, and ultimately incurring substantial debt.  Unfortunately, there are many people who don’t employ this simple solution.  When people ignore their spending, they are much more likely to accumulate debt unknowingly.

• Irregular Expenses.  We choose to use the term “irregular” to describe expenses that many people prefer to call “unexpected”.  Some common examples would include car problems and home repairs.  We will concede the point that many of these expenses are not totally predictable with regard to exactly when they will happen.  However, that doesn’t mean that they are “unexpected” – after all, we’re sure you’re aware that (to use one example) car repair and maintenance will cost you some money at some time.  The objective here is to not be caught off-guard when these expenses arise.  It’s always important to save and put away money in case these expenses arise.

Although it is very easy to accumulate an overwhelming amount of debt out of necessity – buying groceries or paying rent – it is even easier when people buy what they cannot afford.

If your debt is becoming overwhelming, then don’t hesitate to contact the experienced and professional counsellors at InCharge Canada today.  We can provide the counselling, education, and resources you need to regain your financial independence. Call 416-637-6820 or visit the InCharge Canada website for more information.