This & That: Credit Edition
Posted by Gail | Filed under Credit Wise, This & That
I’ve been talking about money for a really long time. And I’ve been talking about credit – and it’s abuse – for over six years now. I’m still surprised at what people don’t know about credit. And sometimes I’m shocked at people’s apathy when it comes to taking control of their credit. It is as if we truly believe we are at the whim of those “big companies.” Well, we may be as individuals. But as a group, we are powerful and can make changes.
C Wrote: Hi Gail! I love your attitude and you work! Here is my question in 2009, I was young and stupid and didn’t pay a cell phone bill due to “bill amount discrepancies”. I ignored the bill collectors until 2008 when I matured and realized I needed to clear my credit. I settled with the creditor and paid my dues. When I entered into school for fall 2010, I thought it would be a good idea to see how much my credit has grown. I was shocked to discover that the cell phone company never closed my account and it was still listed as OPEN and under collections. I phoned Rogers and then the creditors and they both blamed each other. When eventually the creditor admitted they forgot to send a note to Equifax. They said they would close it within 30 days. That was about 10 months ago now, and I am disgusted to say it is still listed on my credit report as open and leaving a long black mark even though it has been paid for over 2 years. What do I do? Is there someone who can deal with this for me whose voice actually matters? Can they compensate my 2 years of broken credit? Please help Gail!
Gail Says: I’m sorry that you’re having such a tough time with this. Your question highlights one of the biggest flaws with the credit reporting system. Lenders and agencies can say anything they want about you and it goes on your credit history. If you dispute it, and they deny it, even if they are lying like rugs you’re the one who gets hurt. And if they don’t take the steps to fix the problems they’ve created in a timely way, there is no consequence. I’ve heard horror stories from bodies whose credit histories (and credit scores) have been trashed by incorrect information. I’ve even had a black mark placed on my credit history for charges that went through on a card that was reported lost. And since there’s no main credit adjudicator or ombudsman, nothing ever seems to be done to fix the problem. You must keep insisting that the incorrect information is removed from your credit record. While you’re at it, tell the world just how much trouble you’re having. Maybe people will learn from your mistake and bring some pressure to bear on a system that does not function efficiently because it requires no “proof” from lenders before adding a black mark to accounts.
BTW, for those not yet bitten, the worst offenders of incorrect credit history information are the department store credit cards and other retail credit cards. Cut ‘em up. Cancel the accounts. If you must use credit, only use a card issued by a Canadian bank.
B Wrote: So I was trying to look up information on OPD’s (Orderly Payments of Debt), unfortunately I don’t think you have any (you probably mentioned it once or twice if I recall), but with this OPD (my husband is on) we currently owe $18,000 left at 5% (started at $52,000 end of 2009) so we are going by smoothly and hopefully have it paid by next Aug (July if I can squeeze in extra payments towards it) anyways questions:
1. Being on OPD that does affect his credit rating, so would it stay at a very low number? When we got it checked online (Feb 2011) it said he has a 580…so that’s not bad being he has paid the monthly payments on time since we been on it, but assumed it stayed lower?
2. After the debt it gone (OPD) how will this affect his future credit applications? I’m worried banks might see it as bankruptcy?!?
3. Our mortgage gets renewed next July (Aug is when the last payment should be made to OPD) how will this affect our ability to get a lower interest rate on our mortgage (currently 6.39)?
4. When does this, if ever leave his credit report?
Thank you I really appreciate all the Gailism’s you have given throughout your blog, TV, radios…in person (one day I will see ya).
Gail Says: An OPD is viewed similarly to a consumer proposal. Available only in certain provinces (Alberta, Saskatchewan, Prince Edward Island, and Nova Scotia) and Orderly Payment of Debts is a consolidation order and will most certainly be viewed by lenders as pretty close to a bankruptcy (it’s an R7 instead of an R9, but the distinction is minor in the eyes of a lender). An OPD differs from a consumer proposal in that you cannot freeze the interest or negotiate a reduction to the principal so you end up paying off all the debt over a longer period of time. In all likelihood, your mortgage interest rate will go up if your lender bothers to check your credit history. Assuming you’ve paid your mortgage on time without a problem, you might squeak by with the rate renewal being pretty typical if they don’t check. The OPD will stay on the credit history for six years from the date of completion.
C Wrote: I love your show and watch it while I work out in the morning! My husband and I are 50 years old, and my husband just left his job of 25 years to begin a new career elsewhere, similar pay. He can pull his pension out of his company, which amounts to about $400,000 before taxes. We have an enormous mortgage of $700,000 and although we are making the payments and living fairly comfortable, we have no money left over at the end of every month. My husband wants to invest the pension money with our financial advisor, I would like to take the pension money and put it towards our mortgage, even though we will have to pay taxes if we pull it. I realize interest rates are low, but in this economy I still think it is better than risking it in investments, even if they are fairly conservative investments. What do you think?
Gail Says: Frankly m’dear, I think you’re nuts. You’ve lost sight of the forest for the trees. If the debt is driving you wild, get rid of it. What are you doing with a $700,000 mortgage at your age? For heaven’s sake don’t pay half of his pension to taxes for the sake of your need to get that mortgage gone. You’d have just over $200,000 to apply to the mortgage leaving you with half a mil in debt. Sell the house and get something that’s more in keeping with your income. If you’re determined to keep the house, you better find a way to make more money.
N Wrote: I was just watching the baby version of Til Debt do us Part and there was this formula of how to figure out what your monthly payment should be for debt. You put the debt and the interest rate. Then you figure out what the monthly interest is, etc etc. I wanted to know how you figure out what the monthly interest is and what the rest of the formula is.
I know there is the debt repayment formula sheet available that tells you what the monthly payment has to be to get out of debt in 12, 24 and 36 months but this other one seemed more specific about how you figure out the interest. Does this make any sense?
Gail Says: Take the balance, multiply by the interest rate, and divide by 12. That’s the monthly interest. Take the balance; divide by the number of months in which you want to be out of debt. So if your balance is $13,500 and you want to be out of debt in 24 months, it’d be $13,500 ÷ 24. That’ll give you your monthly principal repayment. Add the two together to get your monthly payment. If it’s too much, extend the number of months for the principal repayment calculation. Or make more money.
T Wrote: We have an $800.00 overdraft on our account how do I budget for that on my budget sheet? We use this all the time and our account is always in the negative. Until our next pay which brings the balance back again. It’s a vicious cycle and I don’t know how to stop it.
Gail Says: If you want to get out of overdraft and back into the black, it’s gonna take some belt-tightening for a few months. First, list your monthly Fixed Essential Expenses. These are the bills that you have to cover every month like your mortgage and car payment, your minimums on your debt and your childcare expenses. Total it up.
Next, list your monthly Variable Essential Expenses…The costs that you simply can’t avoid, like food and gas — we’re talking the bare minimums to get you through the month. There’s no clothing, no movies, no extras at all on this list. Total it up.
Subtract these two totals from your income. How much do you have left? (If you don’t have enough to cover the unessential expenses in your life – cell phone, satellite service and the like, you can see your problem.) Now it’s time to cut back on the nice-to-haves until you’re out of the hole. Change your services to the most basic you can get away with or ask that they be suspended for a couple of months.
Get ready to live on this very harsh, very tight budget for a month. Just one month. Take all the rest of the money you make and stick it in an envelope, a jar, or a high interest savings account… as long as you don’t spend it.
You’re not allowed to use your credit during this process. You are, in essence, having a No Shop Month.
At the end of the month, add up how much you’ve got left after all your bills have been paid. Is it enough to cover your overdraft? If it isn’t, then you’ll have to live through this belt-tightening horror for another month (or three) until you’re back in the black.
January 12, 2012 at 7:59 am
I would never touch my pension money to pay debt. As I approach 50 I realize how woefully inadequate my pension savings rate has been and now that I have a decent emergency fund will be working to put every longterm savings penny into pension savings. A $400,000 pension savings, even if it just sits in the bank and does nothing is still a $20,000 a year pension for at least 20 years – start drawing at 65 and that carries you till 85. I can’t believe people would be willing to cash it, pay tax on it and still not even make a dent in their debt.
January 12, 2012 at 8:44 am
Is there a blog on the R1 to R9 credit score? I was watching an episode of TDDP and Gail made the couple wear T-Shirts with their R score and explain to people at a bus stop what they meant. I had never heard of an R type score I though credit scores were a number like 420 or 540 or some thing like that. I would like to know more about them. I have always had good credit, never missed a payment and pay my cc off every month, so never felt the need to check my score. Before I do I would like to know more about them.
January 12, 2012 at 10:15 am
SandyM – A friendly suggestion: I’m no financial expert, but I think everyone should periodically check their credit rating, even if they are great with their finances. When you order a credit report, you get a list of open or closed credit accounts and a list of who has run a credit check on your account lately. There are often mistakes on the report, and wrong information can affect your score and therefore the interest rates you are charged. I check every year on Jan 1st, when I also rejig my budget for the coming year based on the previous year’s spending, and review my financial plans. I order a credit report from Equifax and read every line to make sure all is okay. It’s actually a nice start to the year and keeps me focussed on my financial goals.
January 12, 2012 at 10:51 am
The thought of having a $700,000 mortgage at my age makes me nauseated. I wouldn’t be able to sleep at night.
January 12, 2012 at 10:52 am
I agree with MP3 (and Gail) on the ‘cash pension to pay small part of mortgage’ question. $20,000 per year, plus the various government retirement payments would make for a reasonably ok/comfortable retirement (even assuming they didn’t add anything else to it prior to retirement) if a couple didn’t have any debt and they lived a simple life.
However, since they owe $700,000 at 50 (holy smokes!), there’s no way they’ll be debt free by 65 (unless they make at least 10,000 or 11,000 monthly, net), which I doubt. They need to sell and either rent, or buy something much less expensive (that can be paid off within 15 years, max).
I get her point that investing the money could be risky, but given the taxes they’d pay by pulling out the pension, they could lose HALF their money if the investments tanked, and still end up with the same amount at the end. They should just choose low risk investments instead.
January 12, 2012 at 12:08 pm
I wish I know more people with on the OPD, Thank you Gail for posting…I hope it gets some awareness out there for people who are truly stuck in the mud!
January 12, 2012 at 12:48 pm
1) I did a no-shop months and it was fantastic – for my life and I couldn’t believe my bank account balance at the end! I was able to go back to school with the money I had saved in one month – I never realized how much I was spending on friviolities… ie restaurants! I wouldn’t have tried it if it weren’t for Gail – thank you!
2) I got a Department store credit card and I wanted to close it but someone told me that that would look bad on my credit. Is that true?
Thanks!
January 12, 2012 at 12:49 pm
correction: month! just one, haha.
January 12, 2012 at 12:56 pm
Thirty some years ago, when my husband changed jobs, we took his pension money (abou $13,000) and used it to decorate the house, buy some much needed furniture and pay off accumulated bills. Fast forward to the present, hubby is 68 years old and unable to retire for another 2 years. I’m no good at math, but I’m pretty certain that if that $13,000 had been left to mature under the miracle of compound interest, it likely would allow him to retire sooner rather than later. So, to the lady who asked, ‘Don’t do it!’ would be my advice.
January 12, 2012 at 2:16 pm
To “C” with the 700K mortgage. NO ONE should have a 700K mortgage unless they’re a millionaire. You’re a 10-15 years away from retirement. What are you thinking?
Have you read the news lately? Banks and the media have finally woken up and are FINALLY admitting that the Canadian real estate market is due for a correction. Why would you withdraw your husband’s precious pension to slap on to an “investment” that’s about to sour?
Sell your house, downsize, take the proceeds and invest them in non-registered accounts.
Like Gail said, if you really must stay in the house, make more money. And if you stay, the house will not be worth what it is today, when you retire in a few years.
January 12, 2012 at 4:49 pm
@ SandyM – Here is the Industry Canada website that explains the difference between a credit rate, credit score and credit report.
http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02179.html
January 12, 2012 at 7:36 pm
I don’t understand people who cash in their pension or retirement savings for something other than it was meant for. I know someone who left a job because he didn’t like his pension deductions, then cashed what he had put in for some home improvements. Those home improvements eventually become old (ie: windows, roof replacement, flooring, etc) and will wear out before he reaches retirement. What a waste.
January 12, 2012 at 7:45 pm
I think we shouldn’t be so quick to judge. If C lives in Vancouver then a 700,000 mortgage is not out of the question. It is unfortunate and I think they should sell and move somewhere cheaper upon retirement but there are some crazy expensive places to live in Canada.
January 12, 2012 at 9:43 pm
Thanks Gail, learning so much from your shows,books and blogs. I am in my mid fifties, house paid off,some savings however have a child in universities. I’m on disabilitiy pay now, can go to retire early from company. Not sure if it is a good idea,worried about a pension reduction after age 65.
January 13, 2012 at 1:30 am
Thanks for the information about credit reporting, Gail.
Last week when I checked my credit report (in advance of applying for my first mortgage), I was shocked to see a $4500.00 collections account, for a company that I had never heard of.
The charge was for someone named “Brian”, with the same last name as me, but a different address, different birthday and obviously different financial habits. The collections agency was quick to admit their mistake, but I was shocked that it was able to happen in the first place.
The worst part is, the blemish scarred my credit and, despite many hours on the phone with the parties involved, has not yet been removed. This is a system that needs overhauling and accountability. I’ll keep fighting!
-Brianna
January 13, 2012 at 8:12 am
Thanks mels for that site. Now I understand.
January 13, 2012 at 8:49 pm
This might be a silly question, but I’ve been now looking into getting a credit report from one of the two places here that offers them for free by mail (equifax and tansunion), and I’m wondering if they will have the same info, or if I should request it from both simultaneously?
Thanks to anyone who has insight on this…
Shannon
January 13, 2012 at 10:27 pm
@Shannon – What I do is pull one in January and the other in July. That way I’m covering both bases while not having to wait an entire year before I can check again. Here are the phone numbers so you can call in, rather than have to mail in copies of your ID and such…
Equifax (800-465-7166)
TransUnion (800-663-9980)
January 14, 2012 at 1:06 am
Shannon, they each have different info. Different companies report to different credit agencies, and there may be a mistake on one that’s not on the other. We have three here in the states.
January 16, 2012 at 9:36 pm
Great post! I use to work at BMO and ran into so many situations of inaccurate reporting on Equifax. As a result I have one expense card for my job. Forget the department store cards. If I can’t afford it, I can’t have it!
Checking your credit bureau at least once a year will keep you updated with any inaccuracies.
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