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Til Debt Do Us Part

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Lesson 5 US debt run amok and effects on world order (not covered) Etc. ... Websites. Debt Nation: Cdn credit stats and facts. US National Debt Clock ... – PowerPoint PPT presentation

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Title: Til Debt Do Us Part


1
Til Debt Do Us Part
by Darryl Baker
2
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.

3
Nothing is certain in life except death, taxes,
AND debt
4
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
5
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

6
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.

7
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.

8
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.

9
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
10
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.

11
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.

12
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.

13
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.

14
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.

15
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.

16
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17
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.

18
The 2004 income tax load falls to lowest level
in two decades
19
Not getting there! Women still earn 70 of
what men do at full-time, full year jobs
20
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.

21
Growing Inequality in Incomes
22
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23
The rich are accumulating wealth, the rest are
accumulating debt
24
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).

25
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.

26
Ka-ching! Ka-ching! Can you hear it ring! Debt
ratio hits 127
27
In 2006, Cdn household debt reached a record of
1 trillion
28
Debt per household has now surpassed 75,000 and
keeps on rising
29
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.
30
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
31
ON AVERAGE we are getting richer
32
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.

33
Websites
Debt Nation Cdn credit stats and facts
US National Debt Clock
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