Dec 052014
 

Americans VS Canadians on Household Debt

Consumers love to spend money. And around this time of the year big spenders tend to have a whole lot of purse-onality. 😀 A report from the newyorkfed.org shows that Americans have a total of $11.7 trillion of household debt. Roughly 74% of that is mortgage debt. That’s aboot $37,000 of total debt for every man, woman, and child in the U.S.

Meanwhile, a recent report from the Equifax credit bureau reveals that Canadians now carry a total of $1.5 trillion of debt. This is 7.4% more than a year ago. And it works out to be roughly $43,200 per capita. But not to worry because if we remove the mortgage portion, then the total amount of debt has only increased 2.7% from 2013. This is actually quite sustainable, because if the inflation rate is around 2.7% and our debt increases by the same amount then the real value of our debt wouldn’t have gone up at all. 😉

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It looks like Canadians are 17% more indebted than Americans. Sorry 😐 But stable growth of household debt isn’t necessarily a bad thing. In fact, it’s what’s keeping the Canadian economy competitive. Canadians have to stimulate the economy by consumer borrowing and spending. Low interest rates have encouraged people to do just that. Auto loans showed the most significant increase, at 6.8% year-over-year. This is great news for everyone! Drivers can own new cars with affordable financing. Dealers are making more money from selling more cars. The manufacturing sector is firing on all cylinders. And total economic activity increases across the country. 😉 I don’t see any problems with this picture.

A devil’s advocate may suggest that borrowing money to buy expensive cars and speculate in the hot real estate market may not be such a smart idea. But let’s not forget that personal finance is relative. Despite the increase in debt, the delinquency rate — (bills more than 90 days past due) — remains on a downward trend and now stands at just 1.1% of all loans in Canada, Equifax said. In other words people are better off with their debts today than when they had less debt in previous years. That’s because the cost of debt is what determine’s our ability to pay it back. For example I would much rather owe a bank $100 with a 2% interest rate, than owe $80 with a 10% interest rate. Assuming these loans are amortized over many years, the latter loan, despite being a lesser amount, will end up costing me more money. 😕

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Apr 142014
 

What is a credit score? It’s a number typically ranging from 300 (low) to 850 (high) that represents the likelihood of someone paying back a loan on time, based on that person’s past credit history.

Why is it important? Banks use credit scores to determine a lender’s credit worthiness. If someone has a low score because he’s been late on his payments before, then lenders will either refuse to give him a new loan, or agree to lend him money at a higher interest rate, to compensate for the extra risk.

How is the credit score calculated? Broadly speaking, it’s based on 5 factors with different weighting. See breakdown below.

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How do you increase your credit score? Improve the 5 variables that make up the credit score.

  • Credit Searches: Everyone is entitled to one free credit score report per year. Hard pulling your credit history too often could raise red flags and decrease your score.
  • Types of Credit: Have a wide range of different types of debt. Types include mortgage, car loan, credit card, line of credit, student loan, etc.
  • Length of Credit Accounts: The older your credit accounts are, the higher your score will be.
  • Credit/Debt Ratio: Try to keep this ratio below 50%. But ideally it should be under 25% for the best possible score. For example, don’t keep a balance higher than $2,500 on a credit card with a $10,000 maximum credit limit.
  • Payment History: Always pay the bills on time and always pay at least the minimum amount.

Where to find your score. You can request it from any of the three large credit bureaus:  Experian, Equifax, and TransUnion. Credit reports are generally free and can be obtained either through the credit bureau’s website or by letter request, but you may have to pay a fee for the score itself. Cafe Credit lists all services offering free credit scores. Alternatively if your bank recently pulled your credit history you can ask your financial advisor or another banking representative. They will have your full credit report on file, including the score 😉

What’s the typical credit score? In the United States, the median score was 711 in 2011. The proverbial “subprime mortgage crisis” in 2007 got its name because banks were lending to borrowers with credit scores below 640, which is seen as the dividing number between prime and subprime. Typically individuals with subprime status, or credit scores below 640, have trouble meeting their debt obligations.

This means you should keep your own credit score above 640 at the minimum. A score between 700 and 750 would put you in the same boat as most other people. And a score over 750 would give you the lowest interest rates on the market for your next mortgage or auto loan 🙂

Do companies have credit scores too? Yes, but they’re referred to as credit ratings. And instead of a number, companies receive letter grades such as AA, or AA+ for prime and credit worthy businesses, to C or D for more risky borrowers. Credit rating agencies who grade businesses include Moody’s, S&P, and Fitch. Entire countries can be graded as well. According to S&P Canada has the highest possible sovereign credit rating of AAA 😀

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Random Useless Fact: Computer programs can be so inconsiderate sometimes.

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dat frown 🙁