by: dahron, dajena, diana, and suban. agenda - presentation movie issue overview credit cards...
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By: Dahron, Dajena, Diana, and Suban
Agenda - PresentationMovieIssue overviewCredit CardsConsumer DebtBankruptcyConclusion
Future OutlookGame
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Issue OverviewCredit Cards
Consumers’ credit card debt has been steadily rising throughout the years.
Consumer Debt For years, consumer debt levels have been
rising much faster than incomes have. Savings rates are at record lows and
Canadians are spending more than they can afford
Bankruptcy
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What is Credit?Credit is what you use to buy products or
services today and pay for them at a later date.
There are four basic types of credit.Service CreditLoansInstallment CreditCredit Cards
What is a Credit Card?A credit card is a
small plastic card.Issued to consumers
in order to purchase goods and services with credit and pay for them at a later date.
A credit card is the only automatic way of offering credit to a consumer.
Different from a debit card.
Major Credit CardsVisa:- Operates the world's largest retail electronic
payment network.MasterCard- "There are some things money can't buy. For
everything else, there's MasterCard.“American Express [AMEX]- Operates in over 130 countries around the
globe. Capital One- Helped pioneer the mass marketing of credit
cards in the early 1990s.
Credit Card Facts & StatsStandard credit card interest rate (average): 18.9%Range in interest rates by bank-issued credit cards:
9.90%-19.90% Number of retailer-issued credit cards in circulation in
2003: 23.9 millionNumber in 1983: 419,610 Number of credit cards reported lost or stolen in
2003: 810,859Number of cards fraudulently used in 2003: 146,310Amount Canadians owed on their Visa and
MasterCards by the end of 2003: $49.8 billion
History1946: The first bank issued
credit card was invented by John Biggins.
He invented the "Charge-It" program between bank customers and local merchants.
1950: The Diners Club Card issued in the United States was the next step in credit cards.
1960s: First plastic cards introduced.
InterestInterest, is the fee paid for the privilege of
borrowing money. Credit Card issuing companies use interest
rates to generate revenue.Interest rates widely vary with credit cards.Typical credit cards have interest rates
between 7 and 36% in the U.S.Retail store credit cards offer very high
interest rates.
Grace periodIt is the period during which no interest is
charged on a credit card.If you do not pay during the grace period,
you will begin to pay interest.However, on some credit cards, you will be
charged interest on your new purchases immediately -- unless you have paid off your credit card in full the previous month.
How do Grace Periods differ?A card could have:- A typical grace period... - A full grace period...- No grace period...
Why Do Consumers Land in Debt?
Impulse BuyingNot paying balance
on time interest rates charged
Uncontrollable Spending Habits
Ways to Deal with Credit Card Debt
Debt Consolidation:- A debt consolidation loan is a single
loan (generally from a financial institution) that allows you to repay your debts to several or all of your creditors at once.
Ways to Deal with Credit Card DebtDebt Consolidation:
ADVANTAGESADVANTAGES DISADVANTAGESDISADVANTAGES
As a result, you will save on interest payments.
You still have a combined debt. If you are not careful, there is a chance that you will be tempted to use your credit cards again if you still have them.
Furthermore, you will only have to make a single monthly payment to your financial institution.
Financial institutions may not be as flexible as your creditors. If you run into further problems, financial institutions will generally be less understanding and may refuse to accept a late payment.
As long as you follow the terms of your consolidation loan and make your payments on time, your credit rating should not be negatively affected.
Credit HistoryIf someone has ever taken out a loan, used a
credit card or taken advantage of a "buy now, pay later" offer, they will have a credit history.
Credit-reporting agencies are businesses that collect information about you and how long it takes you to pay back money you have borrowed.
This information is called your "credit history".
What is a credit report?A credit report is a snapshot of one’s credit
history.It is one of the main tools lenders use to
decide whether or not to give someone credit.A credit report contains:- Personal information- Credit information- Banking information- Public records- Collection information
What is a credit score?Your credit score is a judgment
about your financial health, at a specific point in time. It indicates the risk you represent for lenders, compared with other consumers.
Credit score is calculated using several factors from one’s credit report.
Agenda – Consumer DebtWhat is it?Personal LoansLine of CreditOverdraft ProtectionCash AdvancesPay Day LoanMortgagesSubprime Mortgages
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Youtube Clip
http://www.crediteducationweekcan
ada.com/home.htm
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Consumer Debt: What is it?Debts resulting from purchasing goods
that are consumable and/or do not appreciate.
High levels of debt = not beneficial because the strain to make regular payments increases
Consumer debt can lead to bankruptcySome debt can be beneficial, if it helps
boost earning power04/21/23
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Personal LoanAn unsecured loan (not backed by collateral) made for personal useHelps finance things like: post-secondary education, a car, a trip, an RRSP contribution or home renovations
Has fixed interest rates & repayment costs
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Personal Loan: ExampleStudent Loan:
Helps finance educationRequires student to pay back
Have to pay interest: 7% in Ontario
Non-dischargeable debt (7Years)3 Options to dealing with the debt
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Line of CreditCan draw down on the line of credit at any
time, as long as the maximum credit limit is not exceeded
Charged interest from the day you withdraw money until you pay the loan back in full
Lower interest rate than a credit card or overdraft
Advantages:Interest is not charged on the unused part of the
line of creditBorrower can draw on the line of credit at any
time 23
Overdraft ProtectionAllows you to withdraw more money
than you have in your bank account $ in account - $ withdrawn from account
= $ overdraftPay interest on overdraft until you make a
deposit that equals the overdraft, plus any accumulated interest and fees
Much cheaper than a payday loanNot all financial institutions offer
overdraft protection24
Cash AdvancesCash withdrawals, usually made with
your credit card at an ABM or a bank Can be as high as your credit limitNo interest-free period
Interest charged from the day you withdraw to the day you pay back in full
Much cheaper option than a payday loan
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Pay Day LoanWhat is it?
A short-term loan that you promise to pay back from your next pay cheque
Have to pay it back on or before your next payday (usually in two weeks or less).
Amount you can borrow = limited to 50 % of the net amount of your pay cheque
A very expensive way to borrow money Owned by private companies and not regulated
by the government26
Pay Day LoanHow does it work?
Prove that you are +18, have a regular income, a permanent address and an active bank account
Show a post-dated cheque/authorize a direct withdrawal from your bank account
The combination of multiple fees and interest charges are what make payday loans so expensive
Sign a loan agreement27
Pay Day LoanHow and when do I pay it back?
Must pay the total amount on or before the date stated in your loan agreement:Includes: amount borrowed, interest, any
additional fees and chargesSome lenders will:
Cash your post-dated cheque or process your direct withdrawal on the day the loan is due
Require cash payment on or before the due dateCash your cheque or process the direct
withdrawal after your loan's due date, and charge you another fee 28
Pay Day LoanHow does it affect my credit report?Credit score = ability to pay back, and on
timeIf the score is bad, you can rebuild it by
using a type of credit and paying the money back on time.
Paying a payday loan on time will not improve your credit score
BUT, if you do not pay it on time and it is sent to a collection agency, it could do damage to your credit report
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Pay Day Loan: CostsComparing the cost of a $300 loan, taken for
14 daysPayday
loanCash
advance on a
credit card
Overdraft protection on a bank account
Borrowing from a line
of credit
Interest — $2.13 $2.42 $1.15+ + + +
Applicable fees $50.00 $2.00 — —= = = =
Total extra cost of loan
$50.00 $4.13 $2.42 $1.15
Cost of loan expressed as a % of amount
borrowed
435%per year
36%per year
21%per year
10%per year
30
Pay Day Loan: Costs
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Mortgages - AmortizationLength of time to pay off a mortgage
Assuming that:Interest rate and payment amount do not
changeAll payments are made on time No additional payments are made
Longest period used to be 25 years – now it can go up to 40 years
Longer period may = lower mortgage paymentsThe shortest amortization period will save you
thousands of dollars in interest in the long run32
Mortgages - Amortization Mortgage amount
Amortization
Monthly payment
Interest paid
$150,000 40 years $865 $264,620
$150,000 35 years $890 $224,795
$150,000 30 years $935 $186,540
$150,000 25 years $1,000 $150,060
$150,000 20 years $1,105 $115,550
$150,000 15 years $1,295 $83,200
$150,000 10 years $1,690 $53,150
Mortgages – Payment OptionsMonthly, semi-monthly, bi-weekly, accelerated bi-weekly, weekly and accelerated weekly payments
They may look the sameThey are notMuch is being saved in interest
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Mortgages – Payment Options Payment Frequency Amortization Interest paid Interest saved
Monthly $1,000 Every Month 25 years $150,060 --
Semi-Monthly $500 24 times a year 25 years $149,660 $400
Bi-Weekly $460 26 times a year 25 years $149,630 $430
Weekly $230 52 times a year 25 years $149,455 $605
Acceleratedbi-weekly
$500 26 times a year 20.7 years $120,650 $29,410
Accelerated weekly
$250 52 times a year 20.6 years $120,300 $29,76035
Mortgages - TypesFixed-Rate (Closed) Mortgage
Lock in interest rate for a predetermined length of time
Allow additional payments without any penalty. To pay more than the annual allowable
maximum, or the entire mortgage you will pay a penalty
Open MortgageCan pay off any amount of mortgage without any
penalty Short term: interest rate = higher than the fixed
rate for a closed mortgage with a similar term 36
Mortgage - TypesVariable Interest Rate Mortgage
At the start, the lender will calculate a mortgage payment that includes both the principal and interest.
Payments do not change during term of mortgageAs the base rate for the variable interest-rate
mortgage changes, so will the interest rate on your mortgage.
Some are completely open, some may be closed and charge a penalty for paying off all or part of the mortgage
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Mortgage - TypesConvertibility Feature
Allows for renegotiations of your interest rate (renew it early) before the maturity date.
Adjustable Rate MortgageThe interest rate and payment
amount are adjustable from time to time during the term.
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Mortgages – Down PaymentMoney paid upfront towards the purchase of your homeMinimum down payment is usually 5%The less you borrow, the less interest you will have to
payIf down payment < 20 % , your mortgage = "high-ratio”
By law, must purchase mortgage default insurance If down payment > 20 % , your mortgage =
"conventional"Does not have to be insured Lender may still require mortgage default insurance for a
high-risk loan
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Subprime MortgagesTarget people who:
Like a mortgage that lends them more than the value of the house
Want mortgages that are structured so that their first payments are extra low
Would be unable to afford the payments if they weren’t structured that way
Are convinced that real estate prices will continue to rise
Who have a poor credit history40
What makes a mortgage “subprime”?
Rising house prices + poor regulation = mortgage monster
"Subprime" the risk associated with a borrowerInterest rates above prime to customers with below-
average credit ratingsSoaring housing prices started to fallPeople with subprime "bargains" suddenly
found their loans were being reset at rates that were in the double-digitsThey could no longer count on the increasing value of
their homes to refinance their way out of the mess41
Could it happen in Canada? Available in Canada
subprime market much smaller US = about 20% of all mortgages Canada = 5 %
Mortgages with less than 20 % down must be secured by mortgage insurance
Canadian financial institutions do not finance more than 100 % of a home's purchase price"We have not seen the aggressive lending practices common
south of the border," said Paul Grewal, chair of the Canadian Association of Accredited Mortgage Professionals. The association says Canadian underwriting practices are "more prudent." 42
Subprime mortgages in CanadaNo evidence linking subprime lending
in Canada with the increase in house pricesIn U.S. a "very high correlation“
Price appreciation in the U.S. housing market was artificialboosted by aggressive lending and irresponsible borrowing
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Then Why Worry?Drop in Canadian housing prices and
increases in interest rates = problems for borrowers
U.S. subprime meltdown spreading to the wider U.S. economy and into Canada
Central banks watching for further signs of subprime fallouts, as interest rates in many more U.S. subprime mortgages reset at higher levels
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BankruptcyMYTH : I’ll just file for
bankruptcy and start over; it seems so easy.
“.. it’s a living nightmare. It can devastate your job, destroy your marriage and steal your peace of mind.”
TRUTH : Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage.
Bankruptcy .. what is it?
method to get out of debtlegally declared the
inability to pay creditors designed to give debtors
a “fresh start”
Bankruptcy.. history 1st bankruptcy law : England in
1542 1604 amendment law : debtor’s
ear cut off 1800 : U.S Congress passed the
first American bankruptcy law 1898 : Modern American
bankruptcy law 1978 : major changes were
made .. 2005 : Bankruptcy Abuse
Prevention and Consumer Protection Act
Bankruptcy .. CONSdoesn’t cover :
- child support payments - alimony, fines, taxes, - student loans
no property ownershipliquidation of assetsdifficult to obtain creditpenalties for bankruptcy
Bankruptcy.. how it workseligibility (?)the means testcounseling requirementslimited creditrepaid total amount? ..
start from the ground up !
Bankruptcy.. typesdiffers from one country to the next; but
purpose and concept of bankruptcy remains the same
i.e In the U.S, (two main ones)
Chapter 7 Bankruptcy (Liquidation of Assets)Chapter 13 Bankruptcy (Repayment Plan)
Bankruptcy (Canada)Bankruptcy in Canada means
that you assign (surrender) all that you own to a Trustee in Bankruptcy in exchange for the elimination of your debts
Personal bankruptcy (consumer debt) is a legal process, governed by federal law (the Bankruptcy & Insolvency Act)
This law is designed to give an honest and unfortunate debtor some relief, while also treating their creditors fairly and equally
Requirements To File for Bankruptcy in CanadaMust live in Canada or do business in
CanadaMust Be Insolvent
Owe at least $1000Not able to pay your debts as they are
due to be paid
Bankruptcy TrusteeBankruptcy Trustees are
federally licensedTheir fees are regulated and
moderate, as to make the cost reasonable
They are licensed by the Superintendent of Bankruptcy to administer proposals and bankruptcies and manage assets in trust. There main job is to also respect both the rights of the debtors and creditors.
Bankruptcy TrusteeConsidered to be the
middle manFor instance, if you
own a house with no mortgage, the trustee would sell the house and pay your creditors. Whatever money that is left behind would be distributed to other creditors.
Bankruptcy TrusteeSuggestion: A bankruptcy trustee
doesn’t just file bankruptcy, they also provide credit counselling, negotiate settlements, and help you to create proposals for creditors in order to avoid bankruptcy.
While they help to solve the problem, they also help prevent the problem.
Final duty could be to recommend an insolvency lawyer who can provide more expertise.
Why Rely on a Trustee?They are the most highly
trained and educated debt consultants in Canada
Almost all of them have a university degree and an accounting designation
All complete a rigorous 3 year bankruptcy and law course
Finally, investigated by the RCMP
They are also constantly being retrained
Three Leading Causes of Bankruptcy1. Job loss or a
reduction of income in general is one of the three leading causes of bankruptcy. Overtime it becomes increasingly difficult to service one’s debts.
Three Leading Causes of Bankruptcy2. Another leading
contributor to bankruptcy is separation or divorce. According to Bankruptcy Canada, about one third of all personal bankruptcies occur around an interval of divorce and separation.
Three Leading Causes of BankruptcyThe final
leading cost is medical problems as they often lead to financial problems.
Wage GarnishmentA garnishment is when your debtors believe you will be unable to pay off your debts and they get a court order for your employer to make payments out of your pay check.
Because bankruptcy is a legal process, there is a stay of proceedings that prevents any garnishment or any legal action from happening (by creditors).
From The Horse’s MouthBankruptcy Options
http://www.bankruptcy-canada.ca/bankruptcy/bankrupt-ca-options.html
Wage GarnishmentThe court sets the amount of the
garnishment, and if you try to convince the creditor that you will pay off your debts, you probably won’t succeed. This is because you haven’t been paying before.
If you are being threatened with garnishment, it is imperative to act quickly.
Duration of Bankruptcy (Canada)Automatic discharge from bankruptcy
after 9 months (minimum) provided that you’ve never been bankrupt and you complete various duties
Your credit will definitely be affected because the bankruptcy will remain on your credit report
It is extremely important to comply your duties during bankruptcy or the 9 month discharge from bankruptcy is postponed
Bankruptcy Duties (Canada)As soon as your bankruptcy starts you
must surrender all assets to your trustee: credit cards, and any non exempt items.
If a creditor’s meeting is held, one must attend to explain the details of your bankruptcy to them, often held at the office of the creditors.
Bankruptcy Duties (Canada)Any monthly surpluses in income are to
reported to the bankruptcy trustee, and your pay stubs are given into the trustee as well. Furthermore, general changes on the status of you and your family’s living conditions are all reported to the trustee.
If you borrow more than $500.00, you must tell your lender that you filed for bankruptcy.
Bankruptcy Duties (Canada)In order to have a successful automatic nine
month discharge, it is imperative that the debtor attend two credit counselling sessions.
They can be one on one or in a group, depends on preference. The first session must take place between 10 and 60 days after filing bankruptcy, and the second must be attended no later than 210 days after filing bankruptcy. Cost: $85.00, plus GST per session.
Bankruptcy Exceptions (Canada)Some debts are not erased;
Bankruptcy only deals with unsecured debts like credit cards and income taxes. Unsecured debts like student loans are also not discharged less than 10 years since you’ve left school.
A secured debt like a mortgage or car loan does not need bankruptcy to be recovered by a creditor since you have given an asset as collateral.
Bankruptcy Exceptions (Canada)The government has some
exemptions that they determine as “necessary for survival” when it comes to the surrender of assets.
For instance: a car worth less than $5650 is exempt in Ontario, personal items worth less than $5650, and household items worth less than $11,300. Differs by provinces and territories.
What About Surplus Income? The amount to be repaid to
your creditors during bankruptcy is based on a formula prescribed by law.
Basically, if you earn more than is necessary for your family’s or your own survival, you must pay this surplus income to your trustee for the creditors.
The more you earn, them more you owe, the more expensive the bankruptcy.
Calculating Surplus Income Payments There are different ways to calculate the percentage of surplus
income to be paid depending on the type of bankruptcy.
http://www.bankruptcy-canada.ca/bankruptcy/surplus-income-calculation.htm#incomelevel
Bankruptcy Truths & Statshttp://mscuttle.wikispaces.com/CIA-Sem-Credit
Divorces: http://www40.statcan.ca/l01/cst01/famil02.htmBankruptcies: http://www40.statcan.ca/l01/cst01/econ11b.htm
ConclusionGovernments have to be more vigilant People need to be educated on the
consequences of their choicesDO NOT CHOOSE THE EXPENSIVE WAY,
LIVE WITHIN YOUR MEANS!!!
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