Til Debt Do Us Part

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Til Debt Do Us Part
by Darryl Baker
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Agenda for thematic unit

• Lesson 1 Basics of debt and credit
• Lesson 2 Economic factors that influence future
  indebtedness
• Lesson 3 Amount of credit card and student loan
  debt (not covered in this powerpoint)
• Lesson 4 Perspectives on American and Canadian
  debt (not covered)
• Lesson 5 US debt run amok and effects on world
  order (not covered)
• Etc.

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Nothing is certain in life except death, taxes,
AND debt
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What is debt?

• Debt is created whenever one of the two
  parties to any transaction puts off turning over
  his/her end of the transaction -the money or the
  things or the work he/she is promising-but gets
  immediately the valuable consideration being
  offered from the other party.

Debt is a means of using future purchasing power
(the amount of goods/services a can buy) in the
present before the money has actually been earned
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Why do we go into debt?

• People take on debt in order to acquire the
  things they need/want that they would never be
  able to obtain if they had to pay for them with
  cash (e.g. house, car)
• Companies use debt to buy assets (e.g. another
  company) in the hopes that the investment will
  return more than the interest payments on the
  debt. This is called leveraging and the company
  that accumulates the debt is said to be
  leveraged.
• Governments issue/sell bonds (a form of debt) to
  their citizens to have the funds available today
  to pay for capital investments (roads, bridges,
  sewers), to pay down existing higher-cost loans,
  and other uses for which they need money today

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When is debt good?

• Debt is good when it is used for the essentials.
• Debt is good when it is limited and controlled.
• A way to do this is set a percentage of your
  income as debt related. In other words, if you
  feel that 30 of your income can be devoted to
  repayments of loans, then stick to that level of
  debt and do not exceed it.
• Debt is good when you make it a habit to pay off
  loans, on time and in full.
• The repayment of even small loans will be good on
  your credit history and those on-time, in-full
  repayments also free up additional cash as you
  dont have to set aside any money for monthly
  interest payments.

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Debt and Your Credit History

• If you have ever taken out a loan, used a credit
  card or taken advantage of a "buy now, pay later"
  offer, you will have a credit history.
• Whenever a financial institution, such as a bank,
  a credit card company, or any other business
  gives you credit, it may send information about
  whether or not you make your payments on time to
  a credit-reporting agency, aka credit bureau. The
  credit bureau collects information about you and
  how long it takes you to pay back money you have
  borrowed. This information is called your "credit
  history". When you want to borrow money in the
  future, the lender will check with a credit
  bureau to see if you have a good credit history.
• Having a good credit history is very important.
  If your credit history is poor, a lender can
  refuse to give you a loan. You may not be able to
  get a mortgage to buy a new house, or take out a
  personal loan. If the lender does decide to give
  you the loan, a poor credit history may mean you
  will have to pay a higher interest rate. A poor
  credit history can affect you in other ways, too.
  For example, a landlord may refuse to rent you an
  apartment because of a poor credit history. It
  may even affect whether you get hired for some
  jobs.

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Youve got history

• Your credit history is recorded in files
  maintained by at least one of Canada's three
  major credit-reporting agencies Equifax,
  TransUnion, Northern Credit Bureaus.
• These agencies provide information about credit
  history in two ways, as a credit report and as a
  credit score.
• A credit report is a "snapshot" of your credit
  history. It is one of the main tools lenders use
  to decide whether or not to give you credit.
• You have the right to see your credit report. No
  one else can have access to the information in
  your report unless you allow it. Usually, when
  you sign documents such as a loan or a credit
  card application, you are allowing the
  organization that is giving you credit to check
  your credit history. Credit-reporting agencies
  will only give information from your credit
  report to someone else when you have given
  permission, and when the request is related to
  credit, collection of a debt, rental of a house
  or an apartment, or an application for employment
  or insurance.
• You may request a free copy of your credit report
  any number of times in a year.

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The Ratings Are In

• Included in your credit report is a rating of
  each of your debt items on a scale from 0 to 9
  (e.g. R0 refers to a new account R1 refers to
  on-time payments R9 refers to bad debt).
• A credit rating assesses the credit worthiness of
  an individual, corporation, or even a country.
• Typically, a credit rating tells a lender or
  investor the probability of the subject being
  able to pay back a loan.
• However, in recent years, credit ratings have
  also been used to adjust insurance premiums,
  determine employment eligibility, and establish
  the amount of a utility or leasing deposit, e.g.
  on a cell phone account.
• A poor credit rating (R9) indicates a high risk
  of defaulting on a loan, and thus leads to high
  interest rates, or the refusal of a loan by the
  creditor.

CANADA TRUST MC last reported to us in 01/01
rating your revolving account as R1, meaning paid
as agreed and up to date. At the time the
reported balance of your account was 285. Your
account number xxx...234. Date account opened
06/99. Credit limit or highest amount of credit
advanced 2000. DATE OF LAST ACTIVITY meaning the
last payment or transaction made on this account
was in 12/00. PREVIOUS PAYMENT STATUS 30 DAYS 1
time (s) account previously R2 meaning one
payment past due
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Your Credit Score

• A credit score (also called a FICO score) is not
  part of a regular credit report. Basically, it's
  a mathematical formula that translates the data
  in a credit report into a three-digit number that
  lenders use to make credit decisions.
• There are many different ways to work out credit
  scores. The credit-reporting agencies Equifax and
  TransUnion use a scale from 300 to 900. High
  scores on this scale are good. The higher your
  score, the lower the risk for the lender.
• Lenders may also have their own ways of arriving
  at credit scores. In addition, lenders must
  decide on the lowest score you can have and still
  borrow money from them. They can also use your
  score to set the interest rate you will pay, e.g.
  if you're between 701 and 750, you'll likely pay
  one-quarter to half a percentage point more than
  someone with a score above 750. Over the term of
  a mortgage, that translates into a difference of
  thousands of dollars in interest.

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Making the Credit Grade

• A Credit Score of 760 means
• It is very unlikely your applications for credit
  cards or other loans will be turned down, based
  on your score alone.
• Most lenders will consider offering you very
  attractive and competitive rates and terms on
  loan products.
• Many lenders will be able to provide you with an
  instant approval status based on your score.

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Doing Yourself Credit

• Pay your bills on time.
• Try to pay your bills in full by the due date. If
  you aren't able to do this, pay at least the
  required minimum amount shown on your monthly
  credit card statement.
• Contact your creditors if you are having trouble
  making payments.
• Make sure that your monthly account statement is
  correct.
• Read the statements and other material you
  receive from your credit card company carefully.
  Keep up to date on any fee increases or changes
  in your card's terms and conditions.
• Deal with companies you know and trust.
• Get a copy of your credit report from all three
  credit-reporting agencies at least once a year
  and make sure they are accurate.

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Not Doing Yourself Credit

• Don't accept or use any form of credit until you
  understand and are comfortable with its terms and
  conditions, to avoid any misunderstandings
  between you and the credit issuer.
• Don't wait to report any unauthorized
  transactions on your account. Contact your credit
  issuer immediately if your bill includes items
  you did not buy.
• Don't go over the credit limit on your credit
  card.

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The Current State of Canadian Family
Finances2006 Report Highlights

• SOCIAL IMPACTS OF FINANCIAL STRESS Insolvency
  is only one indicator of stress. Credit card debt
  is now being used as a safety net and to make
  ends meet. Many people with easy credit access
  coupled with historically low interest rates now
  believe that there is no real need to set funds
  aside for a rainy day. They use new credit to pay
  off old debts. Debt stress is now part of the
  medical lingo. Financial problems also affect the
  work place, as workers spend a lot of work time
  dealing with their problems.
• I REALLY DID GIVE AT THE OFFICE Real hourly
  earnings of employees paid by the hour are still
  slipping. Salaried people are doing just a bit
  better. Combining both types of workers, real
  earnings are up by about 25 cents since 1991.
  Continued employment growth and a few special
  payouts supported household incomes in 2005 and
  2006.
• SECOND EARNERS COMING THROUGH IN RECORD WAY- In
  2004, the second earner among married couples
  with children brought in 19,500, the largest
  ever contribution. Couples with children and only
  one income earner are far more likely to live in
  poverty five times more likely.

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More 2006 Report Highlights

• NOT GETTING THERE Women working at paid jobs on
  a full-time, full-year basis still earn 70 of
  what men do basically unchanged for over a
  decade. Women, especially older women, are
  suffering through a growing share of consumer
  insolvencies. Female lone-parents have made
  positive strides, but there is still a long way
  to go in reducing poverty among these families.

• GROWING INEQUALITY The richest 20 are getting
  a growing share of both the income pie and the
  wealth pie. The rest are either getting a smaller
  piece or just holding on. The poorest 20 have,
  on average, only 400 stashed away for a rainy
  day. There are now 1.1 million millionaire
  households in Canada.

• KA-CHING! DEBT KEEPS CLIMBING Debt loads now
  stand at 127 of incomes another new
  record. Thanks to rising real estate and stock
  market advances, debt is supported by growing
  assets. As such, the financial institutions seem
  to be covered. Many individuals and families are
  not and insolvencies remain high. The risk of
  insolvency is soaring for the 65 crowd.

• MOSTLY NEED AND NOT GREED A special look at
  spending concludes that for many households, much
  of the strain on finances has been due to
  increases in the costs of many basic necessities
  that far outstripped relatively flat incomes. For
  these households, the tendency to save less and
  borrow more may have been due more to need rather
  than to greed.

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The much more rapid advance in spending came at
the expense of savings and the accumulation of
more debt. Annual savings dipped from roughly
7,300 per household in 1990 to about 1,000 in
2006.

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The 2004 income tax load falls to lowest level
in two decades
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Not getting there! Women still earn 70 of
what men do at full-time, full year jobs
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Likelihood of being in debt and poor

• The poverty rate among two earner couple families
  with children held near 3.7 in 2004. The rate
  for one-earner families with children was a much
  higher 18.4 or almost five times more.
• The poverty rate among unattached individuals has
  not changed much over the last 15 years, with
  about 30 living in poverty in 2004 compared to
  31 in 1990.
• About 36 of female lone-parents families lived
  in poverty in 2004, down sharply from about 49
  in 1990.
• Not only are these lone-female parents more
  likely to be working, but the average income of
  those in the paid workforce increased by 17 from
  26,500 in 1990 to 31,100 in 2004. As such, the
  poverty rate for families with one earner dropped
  from 39 in 1990 to 30 in 2004. Still very high.
  

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Growing Inequality in Incomes
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The rich are accumulating wealth, the rest are
accumulating debt
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About 1.1 millionaire households BUT over 2
million with less than 5,000

• The average wealth of the richest 20 of
  households climbed to 1,261,200 in 2005, a jump
  of 297,900 from 1999. This group also had the
  biggest (30.9) percentage increase over the
  period.
• At the other end, for the 20 of households with
  the least to call their own, wealth was
  non-existent and, on average, they were 2,400 in
  the red (owed more debts than owned assets) in
  2005, worse by another 900 compared to 1999.
• According to the 2005 Survey of Financial
  Security, only 10 of households in the bottom
  20 of the wealth distribution had received
  inheritances at some time, compared with 36
  among the richest 20 of households. On average,
  the market value of inheritances for recipients
  in the poorest group was only one-tenth (13,200)
  that of the richest group (136,600).

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How far will 400 go? Poorest households at
greatest risk

• The poorest 20 of households (about 2.7 million
  of them) held, on average, about 400 in deposits
  in a financial institution in 2005 ... they had
  little else to fall back on. This group was also
  hampered by having to support 1.19 of debt for
  every 1.00 of total assets. This is up from
  1.16 in 1999 and is the largest increase in the
  debt-to-assets ratio among any of the five income
  groups.
• The richest 20 of households had about 16,000
  on deposit plus another 47,000 in stocks that
  could be sold quickly. The richest group had
  another advantage it was supporting only five
  cents of debt for every 1.00 of total assets.
  The five cent debt load was unchanged from 1999.
• If the job market was to weaken, it would be more
  of the poorest who would slip over the edge.

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Ka-ching! Ka-ching! Can you hear it ring! Debt
ratio hits 127
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In 2006, Cdn household debt reached a record of
1 trillion
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Debt per household has now surpassed 75,000 and
keeps on rising
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Factors underlying the debt bulge
The most recent data, measured in constant 2004
dollars, tells us that our collective debt load
is up by 42 since 1990 and this compares to an
increase of only 4.8 in real earnings.
Solid employment gains, relatively low interest
rates, rising real estate values and a strong
stock market have sustained the ability to borrow
additional funds from the lending institutions.
As such, debt levels as a percent of total assets
have remained near the 17 level for several
years.
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Insolvencies reported by seniors have risen 11
times - the group that will exhibit the fastest
growth in population and households over the next
two decades
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ON AVERAGE we are getting richer
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BUT do you feel rich

• In 1984, Canadians owed about 187 billion in
  personal debt. In 2004 we owe more than 801
  billion.
• Personal bankruptcies are near record highs. In
  2003, for the first time ever, the average
  Canadian household owed more than its annual
  take-home pay.
• We carry 74 million credit cards three for
  every Canadian over the age of 18. Credit
  counselling agencies say they're busier than
  ever. Students are often graduating with
  accumulated debt of 25,000 or more. Consumer
  debt levels are rising much faster than incomes
  and have been for years. Savings rates are at
  record lows.

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Websites
Debt Nation Cdn credit stats and facts
US National Debt Clock