Module 6

TransUnion Versus Equifax

Transunion Free report once per month Equifax Not free if you want a score (23.95)

Types of Credit

Instalment Loan Revolving Open-End Credit

Home Equity Line of Credit (HELOC)

A loan in which a home serves as collateral, allowing homeowners to borrow up to a specific credit limit (80% or more of the market value of your home minus outstanding mortgage balance), against the equity in their homes.

What causes low score

A low score caused by missed payments or carrying excessive debt. Poor credit history on report for 3 to 10 yrs. Bankruptcy on your report for 6 to 7 yrs.

Debt Management

A poor credit history will appear on your credit report for three to ten years. Bankruptcy filings will remain on your credit report for six to seven years. Re-establish control: Analyze your budget, personal balance sheet, and personal cash flow statement. Establish a self-imposed credit limit. Identify any financial assets that can be used to pay down your debts immediately. Determine where you need to cut back on expenses in order to increase your net cash flow.

Credit Score

A rating that indicates a person's creditworthiness. Creditors rely on this score to help determine whether or not to approve a loan. High credit score could reduce your interest rate.

Advantages of Using Credit

Allows you to achieve your goals sooner. Helps you establish a good credit history and credit score. Eliminates the need for carrying cash. Allows you to make purchases when cash is not an option (e.g. online purchases). Provides additional benefits, such as air miles and travel insurance. Provides short-term loans for emergencies. Statements help you record and keep track of past transactions.

Credit Cards

Establish a good credit history (the easiest way!). Create credit capacity. Eliminate the need for carrying cash. Earn additional benefits. Receive free financing until the due date on your credit card statement. Keep track of your spending by providing you with a consolidated list of the purchases you made.

Personal Loans (continued)

Five C's of Credit: Character, Capacity; Capital, Collateral and Conditions Security: The most common security is a promise to repay the debt as per the loan agreement. Collateral: assets of a borrower that back a loan in the event that the borrower defaults. Secured loan: a loan that is backed, or secured, by collateral. Unsecured loan: a loan that is not backed, or secured, by collateral. Co-signing is sometimes required if credit history of the borrower is weak.

Student Loans

Full-time students: Loan repayment begins after education is completed. Part-time students: Must make interest payments while studying. Student loans must still be paid back if you declare bankruptcy within 7 years of ceasing to be a student.

Purchase versus Lease Decision

Leasing is a popular alternative to buying a car. Advantages of leasing: Do not need a substantial down payment. Return the car at the end of the lease period. Lower monthly car payment. Disadvantages of leasing: No equity investment. Responsible for maintenance costs and damage. Usually a kilometre limit for leased vehicle, other fees.

Car Loans

Personal Preferences Price: Consider the cost of insurance, maintenance, and gas. Condition: Have a qualified mechanic assess a used car. Insurance: Obtain insurance estimates before making a purchase. Resale Value: Estimate resale value by looking at today's resale value of similar cars. Repair Expenses Financing Rate

June 10 - outstanding credit card balance of $2700. New billing period begins on June 11. Outstanding balance for the 1st 15 days, from June 11 to June 25, is $2700. June 25 - you make a payment of $1200. Balance for the remaining 15 days of the billing period, June 26 to July 10, is $1500. Annual interest rate is 21%, compounded daily. Daily interest rate is calculated as 21% ÷ 365 = 0.057534247%.

Previous Balance Method (least favourable) $2700 × 0.057534247% × 30 days = $46.60 Average Daily Balance Method Your daily balance was $2700 for the first 15 days and $1500 for the last 15 days, your average daily balance was $2100 for the 30-day billing cycle.$2100 × 0.057534247% × 30 days = $36.25 Adjusted Balance Method (most favourable) $1500 × 0.057534247% × 30 days = $25.89

Credit Card Financing (continued)

Previous Balance Method (least favourable) Average Daily Balance Method Adjusted Balance Method (most favourable)

Interpreting Credit Scores

Range from 300 to 900, with 660 or higher being considered a good score (very good is 725+). Each financial institution sets its own criteria to determine whether to extend credit. Acceptable credit score may vary with the type of credit you are seeking.

Credit Reports

Reports provided by credit bureaus that document a person's credit payment history. Primary credit bureaus are Equifax Canada and TransUnion Canada. Ethics: You must give written permission (except in SK, Nova Scotia and PEI; like what?) to allow firms to access your credit report. Credit Reports Information: your personal information, a consumer statement, a summary of your accounts, your account history, bank information regarding any accounts closed for derogatory reasons, etc.

Credit Insurance

Represents a commitment by some consumers to cover credit cards repayments under various circumstances (e.g. accident and sickness, unemployment). The payment period is usually limited to a short term (e.g. three months).

Credit History

Represents your history with credit instruments such as credit cards, retail credit cards, lines of credit, and personal loans and leases. A favourable credit history is established by paying bills in a timely manner.

Identity theft tactics

Shoulder Surfing; Dumpster Diving; Skimming Abuse of legitimate access to records Crime Rings Mailbox tampering

Interest Rate

Typically variable Prime rate: the interest rate a bank charges its best customers. Potential problems: borrower may never get around to paying down the principal; Interest payments may rise to the point where the borrower cannot afford the interest only payment. Always have a plan for repayment.

Protecting Against Identity Theft

You Be particularly careful about your SIN. Talk to your children about identity theft and how to minimize risk. Credit Cards: Keep track of when credit card bills are supposed to arrive. Review credit card and bank statements. Mail: Use a locked mailbox. Ensure your mail is forwarded when you move. Shred or destroy items with your identifying information.

Disadvantages of Using Credit

You may have difficulty making payments. You may make impulse purchases that you cannot afford. You can damage your credit rating. There is an interest cost to using credit. Large credit payments take away from your ability to save. You may need to access savings to cover net cash flow deficiencies.

Improve your credit score

catch up on late payments make at least the minimum payments on time reduce your debt

Credit

funds provided by a creditor to a borrower that the borrower will repay with interest or fees in the future.

Identity Theft

occurs when an individual uses personal, identifying information unique to you without your permission for their personal gain.

Pretexting

occurs when individuals access personal information under false pretenses

Phishing

occurs when pretexting happens online

Home equity

the market value of your home less any outstanding mortgage balance and/or debts held by others that are secured against your property. Pay monthly interest only and pay the principal at a specified maturity date (or at any earlier date)

Comparing Credit Cards

- Acceptance by merchants, Annual fee, Interest rate, Maximum Limit Other Provisions - Are cash advances allowed? what is the fee?- What is the grace period? - Is there a late-payment charge?

Adjusted Balance Method (most favourable)

- Interest is charged based on the balance at the end of the new billing period.

Average Daily Balance Method

- Interest is charged on the average daily balance for the billing period. - Your finance charges will be lower under this method if you pay part of the outstanding balance during the billing period. - Most frequently used method.

Previous Balance Method (least favourable)

- Interest is charged on the balance at the beginning of the new billing period.

Pharming

Similar to phishing, but targeted at larger audiences, it directs users to bogus websites to collect their personal information

Response to Identity Theft

Close your bank accounts and open new ones asap Obtain new ABM cards and telephone cards, with new passwords or PINs Advise the passport office if your passport has been stolen Advise Canada Post if you suspect someone is diverting your mail Advise your telephone, cable, and utility providers about the identity theft Obtain a new driver's license Notify the major credit reporting companies Request that a fraud alert be placed in your file (initial alert is up to 90 days)

Credit Card Features

Credit Limit: specifies the maximum amount of credit allowed. Overdraft Protection: allows purchases beyond stated credit limit, for a fee. Annual Fee Grace Period: period of time from when the credit card statement is "closed" to the time the bill is due. Cash Advances/Convenience Cheques - Interest is charged starting from the date a cash advance is made or a purchase is made using a convenience cheque. 3

Differing Scores among Bureaus

Credit bureaus don't always have access to the same information. Some financial institutions may use more than one credit bureau.

Consumer Credit Products

Credit cards Home equity line of credit Personal loans Car loans Student loans

Personal Loans

Most common source of financing. Sources of Loans: Chartered banks, Finance companies (e.g. Ford Motor Credit Company), Credit unions Loan contract: - Amount of the Loan (principal amount) - Interest Rate (nominal interest rate of the loan) - Loan Repayment Schedule - Maturity or Term: the life or duration of the loan Longer maturity results in a lower monthly payment and more interest paid over the life of the loan.

Negotiating the Price of a Car

Most dealers will negotiate the manufacturer's suggested retail price (MSRP). Beware that dealers may have sales incentives and holdbacks offered by the manufacturer. Negotiating by phone may be beneficial. Trade-in Tactics: Attempt to negotiate price on new car before mentioning that you have a trade-in. The Value of Information Purchasing a Car Online

Credit Card Financing

Paying only a portion of the monthly credit card bill. Interest rate is commonly between 20 and 30 percent. Expensive and should be avoided if possible. Rate may be variable, fixed, tiered, or may be a teaser rate. Finance Charge: the interest and fees you must pay as a result of using credit. - Applies only to balances that were not paid in full before their due date. - Compounded daily

Credit Score (parts)

Payment History Amount of Credit owning length of credit history Type of Credit Used Searched and Acquiring New Credit