by: dahron, dajena, diana, and suban. agenda - presentation movie issue overview credit cards...

By: Dahron, Dajena, Diana, and Suban

Agenda - PresentationMovieIssue overviewCredit CardsConsumer DebtBankruptcyConclusion

Future OutlookGame

04/21/23Free Background from www.brainybetty.com 2

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


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

18

Youtube Clip

http://www.crediteducationweekcan

ada.com/home.htm


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

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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


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


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


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

29

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


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

37

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.


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

39

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

04/21/23

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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


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!!!


by: dahron, dajena, diana, and suban. agenda - presentation movie issue overview credit cards...

Documents

number of credit cards

typical credit cards

retail store credit

mass marketing of credit

major credit cardsvisa

basic types of credit

debit card

number of cards