Thursday, January 31, 2013

Getting rid of debt a priority, report finds

Linda Nguyen January 24, 2013
Canadians are paying off their debts faster, with the number of those more than three months behind on loan payments dropping to a record low, according to a report Thursday from Equifax Canada.
The latest National Credits Trends study by the credit monitoring firm found that the percentage of unpaid non-mortgage debt past-due more than 90 days was 1.19 per cent in the fourth quarter of 2012, a slight decrease from 1.22 per cent in the third quarter.
Nadim Abdo, Equifax's vice-president of consulting solutions, says these rates have been declining since the pre-recession level in 2007, when it was at 1.75 per cent.
"Part of it I would attribute to people looking after their credit and not taking on too much credit," he said. "Credit has become very important for consumers in general. There is more awareness, I would say, then there was before."
The study, which is released each quarter, also found that average credit card balances have dropped by 3.7 per cent compared with the July-September quarter — a sign that people may be trying to pay these off quicker than before.
Despite this, the study also saw an increase of 3.2 per cent on non-mortgage loans, including bank loans, lines of credit, car leases and credit cards in the October-December period, up from a 1.8 per cent increase in the previous quarter.
Equifax said that suggested that Canadian non-mortgage debt totalled $497.4 billion in the fourth quarter, up from $489 billion in the third quarter.
The firm says it found that fewer consumers applied for new loans in the latest quarter, but rather made do with the loans they already had.
And it found an 11 per cent decline in new credit applications, compared with pre-recession levels.
This shows that consumers are learning more control over their credit and debt levels, Abdo said.
"People are (being) financially responsible," he said. "They have the facilities and they're just using them, versus just going crazy and getting those 25 credit cards like we used to back in the heyday."
Abdo also said he expected the drop in loan balances and loan defaults to continue if the economy remains stable.
In previous years, he says Equifax studies have shown that consumers tend to take out more loans, and do not pay them back as quickly, during a volatile economy or periods of high unemployment.
Meanwhile, the Bank of Canada on Tuesday downgraded its economic growth outlook for the country to 1.9 per cent for 2012 and to two per cent for 2013, both three-tenths of a point lower than previously forecast.
The central bank says as a result, interest rates will be kept lower for longer due to the weak economy.

Wednesday, January 30, 2013

My credit score is 788: What does it mean?

Please note: article below discusses "credit scores" not beacon scores. Lenders use a beacon score. When clients pay for to obtain their credit score, they obtain the Equifax Risk Score (ERS) which is a statistical model that predicts the likelihood of a consumer going 90-days past due (or worse, including bankruptcy) within 12 months. A beacon score predicts the likelihood of going 90+ days delinquent within 24 months. There are also slight differences in minimum scoring criteria with ERS usually providing a higher score than a beacon.
My credit score is 788: What does it mean?
January 21, 2013 By Robb Engen
A good credit score is important if you plan to borrow money because it means you'll qualify for lower interest rates on loans and have access to a variety of credit offers.
Your credit score indicates the risk you represent for lenders when compared to other consumers. Higher scores are viewed more favorably. The two credit-reporting agencies, Equifax and TransUnion, use a credit scoring scale from 300 to 900.
I've sent away for my free credit report a couple of times to check for errors, but that report doesn't include your score. I was curious and so last week I went to the Equifax website and paid $23.95 for my credit report and credit score online.
My credit score was 788, which isn't perfect, but most lenders would consider it pretty good.
Credit Score
300 to 559
560 to 659
660 to 724
725 to 759
Very good
% of population
Your credit score is derived from a number of factors including:
  • Payment history – carrying a balance on your credit card, or missing a payment
  • Any collection or bankruptcy recorded against you
  • Outstanding debts – the limit on your credit card (is your balance close to your limit?)
  • Account history – how long have you had credit?
  • Number of recent inquiries made about your credit report
  • Type of credit you're using – a mix of credit cards and loans
The most important factors are your payment history, whether you've ever declared bankruptcy, and the amount of your outstanding credit balances.
Here are six easy steps to improve your credit score:
Pay your bills on time: Utility bill payments aren't recorded in your credit report, but some cell phone companies will report late payments to the credit-reporting agencies, which may impact your score.
Pay your bills in full: If you're not able to do this, make sure to pay the required minimum amount shown on your monthly statement.
Stay below your credit limit: The higher your balance, the more impact it has on your credit score. Keep your balance under 50 per cent of your available limit at any time.
Keep credit applications to a minimum: If too many lenders ask about your credit in a short period of time, it can have a negative effect on your score.
Keep a credit history: You may have a low credit score because you don't have a record of borrowing money and paying it back.
Fix errors in your report: Ask for a free copy of your credit report once a year and check it for accuracy. If you notice any errors, get them fixed as soon as possible.
You shouldn't obsess over your credit score – it only matters if you plan on borrowing. So if you've borrowed responsibly in the past you shouldn't have any trouble getting credit in the future.

Tuesday, January 29, 2013

Decoding Mortgages - Read the Fine Print

When shopping for a mortgage, it's easy to get lost in the fine print. And not all mortgages are created equal. There's a major distinction that you should be aware of: collateral mortgages vs. conventional mortgages. 
With a conventional mortgage, the amount registered is the amount you need to borrow, so, for example, the value of your house minus the amount of your down payment. However, with collateral mortgages, the amount that's registered is the full value of the house, and can, in some cases be up to 125% of the value of your property.
Collateral mortgages are becoming more popular. In 2010, TD made a major shift: the bank was no longer offering conventional mortgages; all its mortgages would be collateral. ING made a similar move in 2011.
According to TD, collateral mortgages allow homeowners to more easily access credit, allowing them to borrow more without additional charges. In an e-mail, TD wrote:
"A collateral charge registration will allow a customer to borrow in the future without requiring a new registration. In contrast, a conventional mortgage would require a new registration if there are changes or increases in the amount of the mortgage."
However, many experts are concerned that collateral mortgages mean less choice and flexibility for consumers.
One concern is that while it can be relatively easy to transfer your conventional mortgage at the end of your term to another lender, a collateral mortgage can be more complicated, and expensive, to move, says mortgage broker Steve Garganis.
Shopping your mortgage around at the end of your term, expert’s advice, can save you a lot of money. While most homeowners renew their mortgages with their current lender, shopping around can save you 0.5% to 1% on your interest rate - which can mean a huge difference in how much you have to pay.

Moody's downgrades long-term ratings of 5 Canadian banks, one credit union

By David Paddon, The Canadian Press
Five big Canadian banks and a credit union were downgraded Monday by Moody's rating agency, which believes they will be more vulnerable than in the past if there's a major shock to the economy.
The downgrades, which Moody's had warned were likely to happen, reflect the agency's ongoing concern that Canadian household debt has risen to historical highs — putting pressure on the institutions' mortgage businesses.
"The Canadian consumer is leveraged almost to the extent that the U.S. consumer was ahead of the housing crash down there some years ago," said Moody's vice-president David Beattie.
As a result, Moody's thinks it's likely that consumers will slow down their borrowing, a major source of business for the banks.
There's also a remote possibility defaults could jump to a dangerous level for the banks if there's a major economic shock that causes a lot of unemployment and a dramatic drop in real estate prices, he said.
"If we thought it was a higher probability, we wouldn't rank the banks as high as we do," Beattie said.
He noted the five banks and the Quebec-based Desjardins credit union remain among the most highly rated of those tracked by Moody's.
Toronto-Dominion Bank is the highest rated of the six, at AA1 (down from AAA). Scotiabank and Desjardins drop to AA2 (from AA1), CIBC, Bank of Montreal and National Bank slip to AA3 (from AA2).
A downgrade by a credit rating agency usually means investors will demand a higher interest rate when a company goes to raise cash by issuing bonds or other debt.
The rating agency said National, BMO and Scotiabank face additional risk from the amount of their profit that comes from capital markets operations, which lend large amounts to corporations and advise businesses on debt and stock issues.
"What's concerning for us is the degree of reliance that some of the Canadian banks have to their capital markets businesses — because of their instability," Beattie said.
He noted that Moody's had already downgraded Royal Bank last year as part of a review of large global players in the capital markets industry.
Finance Minister Jim Flaherty issued a statement saying the Canadian financial sector is "sound and well regulated" by the federal government.
"Our government has taken aggressive and proactive actions since 2008 to protect the Canadian housing market and curb personal debt. We will continue to monitor the housing market to ensure its long-term stability," Flaherty said in statement.
New Democrat finance critic Peggy Nash disagreed, accusing the Conservatives of mismanaging the long-term health of Canada's economy.
"With sluggish business investment and a contracting government sector, Conservatives have relied on consumer debt to prop up Canada's economy. This reckless policy has clearly hurt Canada's banks," Nash said.
Moody's Investors Services warned in October it was placing the long-term ratings of the six Canadian financial institutions banks under review for a possible downgrade.
Royal Bank wasn't on the list because its long-term deposit rating had already been dropped to Aa3 from Aa1 in June as part of a move to cut the credit ratings of 15 of the world's largest banks, including Bank of America, JPMorgan Chase, Citigroup and Goldman Sachs