Believe it or not, living without credit can be a liberating experience. I’ve had clients over the years who come into my office for their counseling appointments on cloud nine. They have embraced the credit free lifestyle and are very proud of themselves for having done so.

Benefits of Living Without Credit

• You never have to worry about answering the phone. Your cash wont be calling you to find out when you are going to make your payment.
• You don’t pay extra when making a purchase. When you buy on credit, you have the cost of the article, service charges (if applicable) and most importantly the interest to pay. Sometimes that would mean the article actually cost you double or triple its original cost.
• You can ask for discounts when paying cash. When you pay cash, stores aren’t paying the surcharge on handling your debit or credit card. Sometimes they will give you a discount if you pay cash.
• You never have to worry about repossession or foreclosure.
• You don’t have to wait on credit approval.
• When you sell an asset the money is yours, not dispersed to a creditor first.
• You never have to worry about where the money for payments will come from

Unless you are truly determined to have the peace that no credit brings, it is likely you will carry at least a mortgage. With determination and fiscal discipline, you can make that disappear in the shortest time possible. If you want to chase the dream of owning a home, you really do need to clear up your existing credit obligations and implement a savings program. The more disciplined about it you are, the greater your success will be.

One of the biggest challenges we face when it comes to handling money and in particular credit is learning how to manage ourselves. Many of us have come out of generations where it seems the willingness of our parents and grandparents to save and do without in order to get what they really wanted has gone by the wayside. We’ve been brought up to believe that we have an entitlement to the biggest and the best just because others can.

Going on a credit diet (no using credit allowed)

• You learn to discern between wants, needs and necessities
• You will experience less stress and worry
• You are forced to live within your means — if you don’t have the cash, you don’t buy
• You will become more price conscious — studies have shown we are less aware and more extravagant when using plastic
• You will have an opportunity to learn and strengthen skills at budgeting and timely bill payment
• You will get in touch with your feelings — credit cards have less emotion attached than physically letting go of your cold hard cash

Once You Are Debt Free

• You can put away an emergency fund to provide you with the safety net credit cards used to. Start with $1000 and build up to 3-6 months worth of expenses
• Save for your goals
• You will earn interest instead of paying it.
• Buy a car for cash instead of on credit as the value on cars drop faster than a loan
• You will be able to invest for retirement with confidence
• Use Paypal or other debit systems which take the money from your account when purchasing online

Once you have learned greater fiscal discipline you will be able to take credit on with greater caution and respect for the dangers of using it. The objective is to only purchase on credit something which will increase in value like your home.

Is being without credit a frightening prospect? What frightens you most? Have you lived debt free? Share the feeling with others.

Almost all the clients I meet with, who don’t yet have a home, have a dream of owning a home. So, the question most on their minds right now would be do the new rules impact their dream? My considered answer would be … maybe. Helpful, eh?

Actually there is a reason for my middle of the road response. There is more than one way to pursue the dream of owning a home. There is the prudent, planning and saving towards realization of the dream and then there is the almost scatter gun effort. For those who are prudent, planning and saving — it is unlikely the changes will have an impact on them. For those with the scatter gun effect — yes the changes likely will have an impact and they should.

I’ve been amazed at times by the number of clients who meet with me for counseling who are focused on wanting an answer to when they can buy their home to the exclusion of any discussion of planning or saving. These clients are people who have recently done a filing under the Bankruptcy and Insolvency Act. This is an opportunity for them to make a fresh start and with some fiscal discipline finally realize their dream of home ownership.

Many have gotten themselves caught up in the marketing that paying a mortgage is better than paying rent. That to a degree is true, as long as you actually can afford the investment it takes to own a home. If you are paying $700 a month in rent and your mortgage payment could be $600 a month it is easy to make the jump to the conclusion you are wasting at least $100 per month. When you are renting, you are not paying insurance on the property, repair and maintenance, property taxes etc. Those are just the basic additional expenses.

Right now, the temptation to jump into home ownership without having taken the time and effort to save and  plan what you can actually afford is powerful. Interest rates are at an historical low. They will be unlikely to go this low again. That’s wonderful in the short term but it is in the long term you need to be concerned about.

One of the reasons the government has changed the rules to require lenders to evaluate a mortgage application based on the greater of either the contract rate (what they are offering you) and the five year fixed rate mortgage rate is to make the evaluation a bit tougher. By evaluating the mortgage based on a higher interest rate the lender explores your ability to pay when interest rates begin to move up. They will be moving up and likely sooner than later.

If you are really serious that you want to own a home you need to sit down now, rather than later, and write up a clear picture of your situation. What is your family income? What debts do you owe? What is the total of the monthly payments? What amount are you saving each month?

If you are not doing any saving, then you need to develop a savings plan, you are going to need at least 5% of the value of the home as a down payment under current rules. The more you save towards the down payment, the more interest you will save down the road and the lower your mortgage payments will be.

If you are not saving because paying your debts is taking the money you would put towards saving then it is time to get serious about paying down your debts or exploring if you need to be considering restructuring your debt in order to get onto a firm footing. You can contact us through the GETTING HELP page for a free analysis.

Let’s have a brief look at the problems you may be suffering from:

Not Planning – Planning finances isn’t as much fun as planning vacations but your finances will be around a lot longer. We have a tendency to procrastinate and we’re no different when it comes to our finances. We let credit card balances accumulate instead of getting serious about getting them paid off, we put money into investments and then never get around to examining if we’re getting a decent return on our investment. Failing to plan is planning to fail.

Overspending — The average Canadian only saves about 5% of their income. Many Canadians have no idea where their money goes and don’t make an effort to track it. Being deliberate about determining the difference between needs and wants is vital to learning to reign in spending and start putting those hard earned dollars into savings.

Buying With Consumer Credit — Buying on credit encourages you to buy more than you can really afford. Carrying a balance on your credit card from month to month reduces your future available income as you have the interest to pay from month to month.

Delaying Saving For Retirement – The later in life you wait to start saving for retirement, the harder it will be to reach your goal, assuming you actually set one. For the most part, you need about 10% of your income over your working lifetime for retirement. Winning the lottery is not a retirement plan.

Falling Prey to Financial Sales Pitches — Be very very wary of any investment offer which doesn’t allow you to either give it some thought or get a second opinion. If the person trying to sell you on the investment is pressuring you to commit, you need to back away.

Not Doing Your Homework – You need to treat your financial services purchases as seriously as you treat purchasing a car or a home. Explore your options, check reviews from independent third parties, get recommendations etc. This is especially important in selecting a Financial Adviser.

Making Decisions Based on Emotion — Fear, stress, worry can either drive us to change for the better or to make mistakes. Life changes means you need to examine your situation and your goals, to adjust as needed. Don’t ever make a decision on changes based on your fear of what might happen, make your decisions based on the available information and advise from others who are not struggling with that fear in the pit of your stomach.

Not Separating the Wheat From the Chaff — Not everyone who writes about finances and financial services are an expert. That includes me. You need to always keep in mind, you are your best adviser IF you make sure to educate yourself wisely.

Exposing Yourself to Catastrophic Risk –  You’ve bought insurances to cover emergencies and diligent worked a savings program to cover unexpected job losses. How often do you examine your insurance coverage to determine if they will cover you should you have to make a claim? Often your understanding of what the policy will cover and what it says are miles apart, don’t wait until you need it before you learn that.

Focusing Too Much on Money — Money shouldn’t be the centre of your world. It is important to look after your financial health but don’t let it consume you. You have to balance your financial work with your family life, your health and your social activities. Find the balance point, don’t let it control your existence.

With effort, education and patience you can stop sabotaging yourself and gain confidence in handling your finances.

Your Banker
Usually the first thought you have when your finances start to go off track is to appeal to your banker for help. The most common form of that ‘help’ is to consolidate your debts into one loan so you can pay it off with one payment a month.

That sounds like it would really be the ticket out of the problem. Keep in mind, your banker has a job to do, to sell you banking services and helping their employer make a profit. You need to explore very carefully how much the difference in interest costs would be to determine if you would actually benefit from a consolidation loan.

If the total interest is not substantially lower, you are in fact incurring more debt while you are trying to wrestle the total load into the ground, that is not a benefit.

My suggestion: inquire if you would qualify for a consolidation loan but don’t commit until you have explored all your possibilities and carefully examined the total costs. A diversified list of debts is actually to your advantage. Once you consolidate and then start having difficulty meeting your payments, your available options become fewer.

Mortgage company
If you have accumulated some equity in your home, considering an increase in your mortgage could be one way to bring your debts under control. Proceed with caution when wanting to take this approach. You don’t want to over mortgage your home, nor add on high interest debt which would put you in jeopardy later of not being able to carry the debt load.

I strongly suggest you contact CSS before going after a mortgage, you’ll need a review of your options to determine if mortgaging to consolidate debt is a good idea. If you are already looking at a mortgage, don’t allow the amount of the mortgage to exceed 80% of the value of your home and DON’T sign any deal which doesn’t consolidate all of your debt and leave you with a payment you are certain you can manage.

My suggestion: only look at doing re-mortgaging if the benefits far outweigh the downside and if you don’t exceed 75-80% of the value of your home. Be extremely cautious here. Your mortgage is secure debt. If the plan doesn’t work out, you could be placing yourself in danger of losing your home if you fall behind on the payments.

Credit Counseling
Credit Counseling firms are usually non-profit organizations who work with you to develop a budget and a repayment plan that your creditors will agree to. For people owing total unsecured debt less than about $15,000 this approach can be effective as long as there is no Income Tax debt involved.

All your creditors are not required to take part in the repayment plan. Any who choose not to take part can still continue to press you for payment. Non-profit credit counseling organizations usually receive at least a portion of their funding from those who grant credit. That creates a conflict of interest, you need to be wary of.

My suggestion: If you owe less than $15,000 and no tax debt is involved, you can likely benefit from credit counseling. Search out 2-3 non-profit agencies and find out what their plan would be for you. Go with the one which you feel most comfortable with.

Trustee in Bankruptcy
A Trustee is an officer of the bankruptcy and insolvency court. They have a duty to work in the interests of your creditors while being able to provide you with advice on the bankruptcy ‘process’. Note, this is the process, this is not advice on how you can protect your assets or how to best leverage your current situation to work as much to your advantage as possible.

If you eventually find you need to file a consumer proposal or a bankruptcy, you will have to attend in front of a Trustee in Bankruptcy. The trustee receives his income out of the money you pay into the court. In a consumer proposal, the amount the trustee will receive from what you pay to the court to go to your creditors increases with the value of the proposal.

The question is, are you going to attend in front of a trustee alone or with someone who is going to represent you?

My suggestion: Don’t talk to a trustee until you have talked to someone who represents your interests in the process.

Insolvency Counselor
An insolvency counselor which is what Credit Support Services provides. We are focused on how to get you out of a bad debt situation with as much as you can legally retain intact. We are who you need to talk to before you make any final decision on any of the above options.

Why? Because the strength of our business is providing you, the consumer, with some confidence you are getting as much benefit from the process as you are able to. Our objective is for you to get an agreement with your creditors which leaves your assets intact and is based on a payment you can manage with prudent budgeting.

The initial consultation is no charge. The fees we charge are for our representation of your best interests in the process and you can be sure we are able to deliver that counsel without bias or conflict of interest.

My suggestion: Contact us before you get locked into a worse situation. Just click here to get help.

You’re used to being able to find credit and the first impulse is usually to go find more credit — consolidation loans or home equity loans. With interest rates being low, that seems to be a logical way to deal with those debts, as long as you are working and the rates stay low. In this volatile economy, you have no guarantee either a job or low interest rates will be stable.

There are options to dealing with your debts based on your ability to pay. The most important step you can take right now is — DON’T Panic! Take a deep breath and take a good look at the situation.

You’ll need to assemble some information in order to have a good look at the situation. You’ll need to know what your family income is, what your budget each month is and a comprehensive list of all your debts.

Your Budget

It’s surprising how many people never write out a budget. Many people will write out a list of what bills have to be paid each month and subtract that from their income. That is one step in the right direction.

The next step is to know exactly where your money is going each month. A careful tracking of every penny spent for at least a month can be a real eye opener. We see the major expenses flowing out of our income, utilities, insurance, mortgage/rent, car payment, loan payments, credit card payments etc. What we don’t see and often miss, is the smaller payments which add up.

We’ll pick up a coffee, cigarettes, papers, go out to lunch, do some shopping and just don’t track how much we’re spending in the course of a month. Keep track of your cash expenses, even for the little things. Pull out that credit card statement and take a look at what you’ve charged. Sort the expenses into groupings to get totals of each group.

Are there expenses you can cut? Will those cuts allow you to save and develop a cushion for emergencies? Will those cuts allow you to just stay abreast of your current debt load?

If the expenses you trim allow you to develop a savings program while staying abreast of your current debts, you’re probably going to okay at least in the short term. You can focus on increasing your family income and paying down your debts.

If the expenses you trim only allows you to stay abreast of your current debts or doesn’t even cover them, you’ve got a problem and need to seek help. The question then becomes, where to look for help? Your banker? Credit counselling? Trustee in bankruptcy? Insolvency Counselor? Mortgage company?

In my next post, I’m going to explore those sources and make some suggestions where to start.

Question: Have you taken a good look at your debt situation lately?

You Can Set The Agenda

As visitors to this blog, we need to know what help you are seeking. Feel free to use our Contact Form to send your questions to us. When I see a trend in the questions I receive, I will know that a post is in order on that subject.

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Proof of income:
♦ Proof of income can be Pay Stubs, Tax Assessments, Tax Returns, Letter from employer with employer’s contact information.

Self-employed proof of Income:
♦ 3 past years Tax & Assessments.
♦ Self-declared income by way of a letter stating your gross income.

Closing costs:
♦ Ensure you have added all closing costs.
♦ Appraisal will need to be paid before funding is advanced and it is the responsibility of the buyer, average cost $300.00. Appraisal will not be released until the fee is paid. Appraisal may be waived if mortgage is CMHC insured.
♦ Home Inspection – average $300.00 to $500.00. Usually paid up front by the buyer.
♦ Lawyer fees for Independent Legal Advice (ILA) average cost $150.00. This lawyer represents you. This may  be taken from the mortgage if it was pre-calculated. Don’t leave yourself short if you have not requested it in the mortgage.
♦ Lawyer fees for closing. Can be $1000.00 to $1500.00 if there are no complications. Remember the lender chooses the lawyer and although you pay for it the lawyer represents the LENDER.
♦ Lender fee. There is often a lender fee especially with Trust Companies.
♦ Broker fee. The Broker will disclose in writing both the lender’s and the broker’s fee. Often these two fees are added to the mortgage, not a good idea especially if you can afford to pay them separately.
♦ Land transfer Tax.

Insurance.
♦ There are two different types of insurance required.
♦ CMHC, GenWorth, or In-House Insurance based on lender and current rates, 1% to 3.5% on average of the full amount of the mortgage.  This insures the lender in the event you default on your payments. All financial institutions require this if Loan to value ratio is over 75%.  Some require it  when LTV is below 75% but may pick up part of all of the cost.
♦ Life and Disability insurance is the other. This insures those on the Mortgage in the event one partner dies or becomes disabled.  The mortgage is paid off for the benefit of the survivor. Some disability insurances pay off the mortgage while others only pay the payments for a limited time only so make sure you read the fine print.

Documents:
♦ Copy of Purchase Agreement.
♦ Copy of Listing.

So, I thought it might help our site visitors if I wrote about restoring credit; what works, and what never works.

Unpaid Credit Cards:

Perhaps you have defaulted on credit card payments. A Collection Agent has been assigned to your account and is demanding payments. Let’s say you have not paid for 6 months or more and they are threatening to garnish your wages, or sue you. At this stage you have an “R9” rating at the Credit Bureaus which is the equivalent of being bankrupt. That’s right, it is the same as if you had filed bankruptcy, but it gets worse.

Suppose you pay all your credit card debt off by sending your money to the collection agent, your R9 rating will not change for 6 years. You will have paid everything and still look like you filed bankruptcy.

Collection Agents are reluctant to tell you that and some even go so far as to tell people that their credit will automatically be restored when the debt is paid. This of course is absolutely false, and just so you know, no collection agent can garnish your income without first taking you to court except for the Government Agencies.

There are other options available – to find out more talk to one of our counsellors.

Re-Establishing Your Credit Rating

If you have already filed a Consumer Proposal or an Assignment In Bankruptcy your credit rating is as poor as it gets. You have been told you need to re-establish your credit and to start that process most trustees suggest you get a “Secured Credit Card” or alternatively, a “ Pre-Paid Credit Card”.

Technically a “secured” credit card is a line of credit secured by Real Estate or some other asset such as a GIC.  A pre-paid credit card is a Debit Card that looks like a Credit Card only it has a monthly fee attached and a deadline for payment of that fee each month. That fee causes the activity to be reported to the Credit Bureau each month and as long as you pay the fee on time you will have a good report generated each month at the Bureau.

If you are late or fail to pay, then you damage your credit again.  A lot of hotels and car rental businesses will not accept a pre-paid credit card so if you are planning to use your card for those purposes, ensure that what you are getting is a “secured credit card”.

NOTE: As far as mortgage financing goes a card that is less than $1,000.00 in value is pretty much a waste of time as far as credit-worthiness goes. Lenders also want this $1,000.00 card to have at least one full year of good history before recognizing it as a start to re-established credit.

Putting Your Savings to Work

I counsel people to save a contingency fund of a minimum of three times their monthly expenses. NB. Add your rent/mortgage; heat; hydro; food; transport; et cetera and multiply that times three. This should be available for a rainy day and whenever it is drawn down it needs replacing immediately.

You may kill two birds with one stone simply by placing this contingency fund on a pre-paid card (Maximum $5,000.00). Use the card for gas or transit. Restore the amount used each month along with the service fee and you will have valid credit rebuilding activity each month. You also know where your emergency money is if you suffer an injury or sickness and your income is reduced or cut off. As long as you pay the service fee and rebuild your limit you will be getting quality brownie-points at the Bureau.

Another credit rebuilder is leveraging your money. Save up and purchase Canada Savings Bonds, (minimum $5,000.00). Use the bonds as security to borrow $5,000.00 from the bank and purchase $5,000.00 for a Registered Retirement Savings Plan (RRSP). The bank will give you the loan for an RRSP because you have security (The Bonds). The RRSP’s will reduce your tax liability and your regular monthly savings can now go to pay off the bank loan. As you pay the loan the bank reports your payment history to the Credit Bureau.

Do not pay the loan off faster than agreed as you want the maximum number of months recorded at the Bureau. End result, you have re-established yourself as a credible borrower and responsible individual worthy of being trusted with credit. You may have gathered that this process takes more than one year.

If you keep your financial affairs in check you will be getting offers from banks and credit card companies in short order. When your credit is restored don’t let yourself get buried in debt again – borrow only for large ticket items such as a car, mortgage, or serious maintenance.

One final word to the wise;

When you hear an ad that says “Call Now” or “Limited Time Offer – the first 10 callers get a bonus”, etc.  ignore them. The same limited time offers run endlessly. Stick to your budget.

Next time:
I will talk about Mortgage Arrears and reinstatement of defaulted mortgages when the bank refuses to take your money and insists on you paying their lawyer directly – know your rights!!!

Regards,
_____W.Lutton._______
William (Bill) Lutton. PLL
BIA Insolvency Counsellor & Licenced Mortgage Agent.

This is the true story, unfortunately, I hear it from lots of people who come to see me after getting into a mortgage they cannot manage.

Each time my client explains, something unusual has happened; a sickness, death, lay off et cetera, and the credit cards get maxed out. They struggle for a while and fall behind on payments to creditors. Sometimes collection agents convince them not to pay their mortgage so that a payment can be sent to the collection agent. Collectors tell them that it’s better to pay the credit cards to keep their good credit and let the mortgage fall behind. (Take note … that is a false statement).

The desperate homeowner diverts mortgage money to pay the collection agents.

Soon the collection agent demands they get a 2nd mortgage to pay off the balances on the credit card debt and often demand that the struggling homeowner goes directly to the lender that the collector recommends. They paint a very nice picture that this particular lender will give them money even though the banks have turned them down. (That is correct – that is why these lenders are in bed with some collection agents).

Soon the homeowner gets the 2nd mortgage which is high interest and repayable monthly at “Interest Only”. The mortgage always has a one (1) year term, but they are told not to worry – it can be renewed again at the end of the year for an additional 1 year term. (Of course that little statement is not written into the mortgage document). They are also told this mortgage will give them an opportunity to rebuild their credit over the coming year. (Only problem is – that will definitely not happen – see further down for reasons).

They pay for 1 year and the lender refuses to renew the mortgage. A demand is made for full payout of the 2nd and foreclosure proceedings commence. The homeowner hunts around at every bank and Mortgage Brokerage firm for replacement financing but gets turned down everywhere.

The lender forecloses and the owners are evicted with the Sheriff giving them seven days to move out.

Restoring your credit in 1 year – true or false?

False: The reason they cannot refinance after one year is that even after you have paid off a credit card in full that has been with a third-party collector, the Credit Bureaus continue to report that event for SIX (6) YEARS as an R9, which if you don’t know the code, that is the same rating as though you had filed a bankruptcy.

The lenders know this and that is why the financing is interest only for 1 year at 15% or higher. They also charge a lender fee and a broker fee of $5,000.00 on average, and the legal fee will average $1,500.00.

Example:

On a $20,000.00 loan at 15% interest only, 20 year Amortization, and 1 year Term = $256.76 per month
$256.76 X 12 = …………………………$ 3,181.12
Lender Fee ………………………………..    2,500.00 Deducted from funds
Broker Fee ……………….………………..    2,500.00 Deducted from funds
Lawyer Fee …………….………………….    1,500.00 In advance
Appraisal Fee ………………………….        300.00 In advance
Closing Costs ………………………….        500.00 Deducted from funds
Total ……………..  $ 10,481.12

In this model the homeowner could receive $14,500 but Municipal property tax must be paid first, then the first mortgage must be brought current if it is in arrears and then the credit cards get paid down. A very costly process.

Later:

If the property is foreclosed on and sold the past homeowner will be sent another bill for any shortfall and the smallest billing I have seen for this event was $7,000.00.

Compare this event to a recent client’s solution:

[I have rounded off the numbers.] This couple had $63,000.00 in credit card debt that was costing them $2,050.00 per month to carry but they were behind on some and it was getting worse.

Their property was worth $315,000.00 and it was mortgaged to 60% loan to value (LTV) at $189,000.00 They had reasonable income but spent beyond their means. They would have to mortgage their property to 85% LTV but would not be able to make the new mortgage payments.

We provided counselling to help them budget and they filed a Consumer Proposal to pay off the credit card debt. The proposal was for $47,250.00 or 75%LTV with monthly payments at $787.50 per month for 60 months without interest. The remainder of the $63,000 will be forgiven when the proposal is paid in full.

They also lost their good credit rating but that was going in the tank anyway, but they kept the main item – their home. Their monthly payments were reduced by $1,262.50 and they pay no interest on the proposal.
Is that not a better solution?

If you are struggling under debt and you own property consider the following before you make the biggest mistake of your life.

What are my priorities?

a) How many years do I want to keep my home before trading up, down, or selling and renting?
b) Will my job force me to relocate any time soon?
c) What are my family needs – will the family increase or decrease any time soon?
d) Do I know enough about my property value and current market trends?
e) Should I sell instead of increasing my mortgage?
f) Can I afford the payments on new financing without needing to run up my credit cards again?
g) Can I change my spending habits and sacrifice some luxuries to pay down debt rather than looking for new mortgages?
h) Have you tried to do this before and now have a second mortgage plus renewed credit card debt? If so you already failed by using this method, why would you try this again with a third mortgage or by rolling the 1st and 2nd into a new first at a higher interest rate?

Make a plan and stick to it:

The answers to these questions will help you and our trained Insolvency Counsellors to determine whether you should be selling, refinancing, filing a Consumer Proposal, or filing for bankruptcy.

Did you know you could file bankruptcy and still keep your Home, Car, RRSP’s, and other valuables?

If you are considering this avenue I strongly recommend you engage one of our Insolvency Counsellors to assist you.

I do not recommend mortgage refinancing that consolidates credit card debt over 75% of the appraised value of your home when added to your existing mortgage. There are other options that are much less expensive and that keep your home from being threatened by Claim Jumpers.

Before you refinance your home ask yourself the serious questions, and call us for a free confidential consultation or complete our form. If nothing else you will be better informed after the meeting.

When bills get harder and harder to pay, life seems to be overwhelming. It doesn’t have to be, there are ways for you to manage your debt without you getting in over your head. That is where we can help, we’re here to represent you. We analyse your situation and recommend the options that would best fit you.

The objective is that you manage the debt instead of it managing you.