Last Tuesday the newspapers were full of stories about PwC Canada’s latest consumer lending survey.  (In case you don’t know what PwC stands for, it’s the acronym for Pricewaterhouse Cooper, which is a consulting company.) PwC had a research company talk to over 600 Canadian homeowners with incomes over $100,000. To put this in perspective, according to the Tax Man, the median after-tax income for Canadian families of two or more persons was $63,800 in 2009, virtually unchanged from 2008 and 2007.

The thing that set my Rant Meter off was this line, as reported in the Financial Post: “Canadians look to their banks in a very paternalistic way in terms of providing good advice and diligence over what’s responsible and prudent for Canadians to borrow.”

Lord love a duck! Why is the expectation of good advice and diligence in terms of responsible lending being cast in the light of childlike expectations? Paternalistic? Really?

Maybe I’m wrong, but isn’t it in the banks’ shareholders’ best interest for them to lend prudently? And how did we get into such a mess that banks are actually turning to legislators and begging for help because the pressure from non-Canadian lenders and lenders of last resort are screwing with common sense and good lending practices.

The PwC guy being quoted terms the lending market a “battlefield.” Are consumers the soldiers that lay fallen because lenders are willing to sacrifice us in their war to gain and retain their little piece of the competitive real estate?

Lest you think that PwC is interested in helping the average Canadian by creating a more reasonable lending arena, let me quote from their Executive Summary: “According to the survey respondents, the majority find consolidated lending products appealing, and most are looking for education about how this product can best work to fit their unique needs. To successfully market consolidated lending products, bankers need to understand their clients’ needs and tune the many detailed product features to each customer’s unique circumstances.”

That blah blah blah means that while we’d like to believe Canadians are finally smartening up about getting out of debt, it’s a lot of talk. The action they want to take is to consolidate their debt (oh, yeah, make this easy for me, puh-lease) and PwC wants to “help” banks create just the right hook to reel in these wide-mouth consumers.

There are some other telling statements in the PwC report, like this gem: “According to the survey, debt isn’t a particularly scary word to the majority of Canadians. Nearly 80% agree that borrowing money is necessary to maintain their household.”

There’s also the revelation that 64% of respondents intend to decrease their borrowing over the next 12 months. Do you believe that intention will win out over a new slew of borrowing products aimed directly at consumers Achilles heels?

Let’s juxtapose that idea against this beauty from the survey: “78% of respondents still believe they have the capacity to borrow more.”

Shoot me now!

Often when people meet me out and about, they want to talk about the people I work with on Til Debt Do Us Part. Very often I hear, “How’d they get themselves in such a mess?”

Here’s how:

#1 No Money Management Skills. Money management is a skill too many people are missing it. Folks fly by the seat of their pants, hoping that things will turn out okay. Some days they do. Many days they don’t and people then run around fire-fighting to stay afloat. If you don’t know how much money you make, how will you know how much money you can spend? If you merrily charge whatever you’re buying on your credit card, but you don’t know how much you have to spend, how will you pay off that credit card when the bill comes in? A lack of money management skills is, perhaps, the biggest predictor of financial failure. All the credit counseling, all the bankruptcies, all the income in the world isn’t going to save your butt if you don’t take the time to figure out how to use what you’ve got to your advantage. There are rules to follow, work to put in, and self-control to be applied. It’s much easier to simply whine, “I can’t” and go happily on shooting yourself in the foot.

#2 Underemployment. Some people are just born lazy. I’ve worked with more than a few people who think that earning $14 an hour for 37.5 hours a week is all they have to do. Bringing home just over $400 a week is fine, if you’re prepared to live on $400 a week. But most people aren’t. They want to buy beer, watch movies, have cell phones and premium cable and everything else their pals have. Sometimes when I tell these people to go Make More Money, they complain that it’ll take away from their Mommy or Daddy jobs. Ya know what? That’s an excuse for not wanting to work harder since many of those same people spend hours a day doing stuff that doesn’t involve their kids. THOSE are the hours you should be spending Making More Money.

#3 Income Goes Down, Spending Doesn’t. People get laid off from work, get sick or stay home to raise their children. Their incomes go down, but their spending doesn’t. They use their credit cards, lines of credit and overdraft protection to fill the gap and then say they are surprised to find they are buried in debt.

#4 No Savings. We seem to have developed an aversion to saving. We use the excuse that we can’t get much return on our money right now, so what’s the point. Ha! Talk about JUSTIFICATION! Wow! We’ve watched the savings rate plummet over the past three decades, hitting the negatives. How can that ever be a good thing? Of course, if we were willing to live on a little less now so that we’d have a cushion set aside in case we lost our jobs, we wouldn’t be pushed into Debt Hell quite so quickly. And if, knowing we were going to take time away from work to raise kids or go back to school, we set aside some money to see us through our future plans, we wouldn’t dig ourselves a tunnel to Debt Hell.  And with three to six months’ worth of Essential Emergency Expenses in the bank, getting sick wouldn’t also make up financially ill.

#5 Getting Sick. Some people believe they will never get sick. It’s why people don’t bother to get critical illness insurance, disability insurance, or life insurance. In my mid-40’s I had to deal with the death of my best friend from cancer. She was in her 40s. And before Cookie died, she had years of dealing first with MS and then with breast cancer and finally brain cancer. It was horrible. If she hadn’t had insurance, she would have been totally screwed. As it was, every month was a challenge financially. And believe me, she didn’t need any more aggravation. Of course, you may not be the one to get sick. It may be your partner, at which point you better have some money to help pay for the things (s)he used to do. Or it may be a child or an elderly relatively that causes you to lose time off work.

Debt is like quicksand: easy to get into and terribly hard to get out of. Know what you have to do to avoid stepping into the quagmire so you can skirt the problems debt brings.

1. Take stock of your debt situation: Make a list of all the places to which you owe money, except for your mortgage, unless you’ve consolidated consumer debt in your mortgage. If so, then add the amount you consolidated to your list.

2. Prioritize your debt: List what you owe by interest rate with the most expensive (the highest rate) at the top of the list. This is the order in which you’ll pay off the debt.

3. Calculate the minimum payment on each debt. That’s what you HAVE to pay to keep current and not bruise your credit history. Write the minimum payments beside each debt, add them up, and that’s the least you can put toward your debt every month.

4. Figure out how much to repay to get out of the hole: If you owe $2,500 on your credit card at 18% and you want that credit card debt gone in six months, you already know it’s going to cost you $37.50 a month in interest. But if you want to get that credit card paid off in six months, you’re going to have to slap about $417 a month against the principle to make it go away. That’s a total of $454.50 a month you’ll have to come up with to make the credit card debt disappear in six months or less. Once you’ve paid off the credit card, you can use the $454.50 you were using to pay it off for your next most expensive debt. That’s called snowballing..

5. Decide where you’re going to get the money: If you want to be debt free, you have to find the money to pay off the debt. It may mean going over your budget with a paring knife. It may mean finding a way to make more money. You’ll do whatever it takes.

6. Make your debt repayments automatic: Set up an auto pay for each debt you’re working to pay off, taking the guess work out of it, and making a firm commitment to the process. Initially you’ll pay the minimum required on all the debt. On your most expensive debt, you’ll auto pay the amount you came up with to have the debt gone by your Debt Freedom Day.

7. Chart your progress: Create a chart that shows how much you owe. You can use boxes or a thermometer graphic. Whatever works for you. Each time your auto pay goes through, colour in one of your boxes, or move your marker up the thermometer so you can see the progress you’re making.

The fact that we can’t seem to get to the end of the month before we get to the end of the money should be our first clue. And the folks who have borrowed… well, they just can’t seem to figure out how to repay the money they have borrowed and have a life at the same time. Not surprising, really.

So what clues might there be that you’re living beyond your means?

Are you saving less than 10% of your net income? Yes. Then you’re living beyond your means. You see, if someone in your family were to have a medical emergency or a blip in their employment, if your roof were to leak or your car give up the ghost, if you should have to cope with a major move, the care of an aging relative, or educational expenses, you’d be up a creek without a paddle. Right GA?  Ideally, you should save as much as you can, with 10% of your gross income being a guide.

Are the balances on your credit cards or lines of credit rising? Yes. Then you’re living beyond your means. Paying only the minimum on your credit cards or lines of credit while you continue to increase the balance you owe is a sure sign you’re a dope. When, exactly, are you going to have the money to finally get rid of the debt? Is some magical wand-waving fairy god mother going to pop into your world and woosh away your debt? Or do you figure that a windfall is in your future? Hey, WAKE UP! If you have a $5,000 credit card balance at 18.9% and make a minimum payment of just 2.5% per month, you’ll end up forking over almost $8,000 in interest over the 25 years it takes you to pay off the balance.

GA owes $95,000. Let’s say she’s averaging an interest rate of just 11%. And let’s say she makes a payment of $2850 a month (ouch!) It’ll cost her almost $19,000 in interest and take 40 months to pay off the debt. Over-extended? I guess so.

Are you missing payments on bills? This is a sure way to ruin your credit rating and increase your interest costs. And it’s a sure sign you’re living beyond your means. If you don’t have a handle on what your monthly bills are, and what it’ll take in income to keep current, then it’s time to get with the program. Get out all the bills that have to be paid every month and make a list. Rank the bills in order of priority. You HAVE to pay your electricity bill, but you don’t HAVE to have premium cable (or any cable for that matter.) Okay, now deduct your HAVE TO PAY amounts from your monthly income in order of importance. When you run out of money, cancel everything else.

Are you taking cash advances on your credit cards? Yes. Then you’re living beyond your means. Cash advances, putting your groceries on credit, applying for new cards so you can transfer balances so you can fool yourself into thinking you’re paying your debt are all signs that you’re in BIG TROUBLE.

I know it’s easy to get credit. I know it’s nice to have what you want when you want it. And I know everyone else is doing it. But just because they’re all walking off the edge of the precipice doesn’t mean you should follow them. And if you’ve been walking in lock-step with a bunch of fools who can’t control their spending to the point that they put themselves and their families at risk, then it’s time to change your pace.

You don’t have to be a follower. You don’t have to continue to do what all the other dopes are doing. You can stop the insanity, take control of your future, and commit to living within your means. I know you can. Do you know you can?

When I polled this audience to see how many people had availed themselves of credit counseling services, 9% said yes. When I asked how many had done a consumer proposal, 5% said yes. And when I asked how many had declared bankruptcy, 7% said yes and another 3.5% said they might need to soon. Cumulatively that 24.5% who are in a financial bind.

On average, according to TransUnion (and they would know), Canadians owe $26,000 not counting their mortgages.  I don’t owe a penny, so someone else has my $26,000 in debt. And since some people have piled their consumer debt into their mortgages, effectively hiding it from this report, the picture is really grim. Average household debt measured against income hit a record high of 147%.

The chief economist for RBC Global Asset Management has been quoted as saying that when interest rates do start to rise it will be very painful for some.

Perhaps the thing that makes me scratch my head the most is the fact that older Canadians are racking up debt at a wicked clip. Just when folks should be piling money away for the inevitable day they must hang up their spurs, they’re out spending money they don’t have.

According to an Ipsos Reid survey conducted for TD Bank, people 44-64 years  and 65+ years are the two groups for which debt growth has outstripped asset growth over the past ten years.  And don’t think that’s because the hydro bill has gone up. Nope, seniors are spending on luxury items.

Have we really learned NOTHING from our American cousins? Are we so hell bent on having a good time that we’re going to continue to ignore the implications of spending money we haven’t yet earned? What will it take for us to wake up to the reality that debt is a disaster waiting to happen?

Have you read School Lenders Part 1, Part 2, Part 3, Part 4 and Part 5?

Collateral is the last of the 5C’s of Lending. When an asset is used as a guarantee for a loan, it is referred to as collateral.

Not all collateral can be taken at full value. If you use investments as collateral for a loan, only part of the value of the investment will be accepted since that investment’s value can go down. Makes sense right?

If you buy a car and the car is used to secure the financing, the car is collateral. That begs the question, why do people with even slightly lower credit scores have to pay so much more in interest when their loans have been collateralized? Could it be because lenders have forgotten just how collateral works? Or is it because lenders like to use lower credit scores as an excuse for charging rapacious rates even when the loan has been secured with collateral.

It makes no sense that someone with a less than stellar credit score should have to pay more on a loan that’s been collateralized, particularly when the most arbitrary things can cause your score to drop.

During the last credit dry spell, lots of people found that their credit card and line of credit limits were arbitrarily being lowered by their lenders. They hadn’t missed a payment. They weren’t abusing their credit. But down came their limits anyway. Used to higher limits, they kept charging away. What’s the diff? After all, they were keeping up with their payments every month. No problem.

Problem! Because the lender reduced their credit limits, they were using more of their credit each month, so the credit scoring system ranked their higher credit utilization as a problem and reduced their credit scores. Lenders then looked at the lower scores as justification for raising interest rates. Yup, lenders created the problem by lowering limits and then profited by increasing interest rates.

Had enough of banks’ irresponsible lending. Join School Lenders on Facebook. Send a letter off to your member of parliament asking that the rules be changed. Spread the word: Tell friends and family and anyone else who will listen. It’s time to insist that lenders re-learn how to lend responsibly.  Next week is credit education week. It’s also School Lenders Week. Are you ready to put away your credit cards and show lenders you want them to act more responsibly?

This is your opportunity to show banks you’ve got the power to stop using credit. While you’re at it, you can show retailers you are happy to use cash so they should come up with a cash payment discount to avoid credit card fees. (You should say this in every store you shop in this week: “If you give me a cash discount, I’ll save you the credit card transaction fees next time I shop here.”)

Here are some stories about School Lenders:

• Lang & O’Leary Exchange
• Wall Street Journal online
• Huffington Post

The 4^th C in the 5-C’s of Lending (y’know, that old way of lending that made lenders do some work, rather than just relying on your credit score) stands for Capital. Once upon a time your Capital – or net worth – was considered in relation to your age. A mature person with a long credit history was expected to have accumulated a greater net worth than a younger person just starting out.

It’s clear that Capital doesn’t mean squat any more. Instead of expecting borrowers to have a solid foundation of assets, lenders encourage people to borrow more and more, even as they are moving into retirement and will have less capacity to repay. Whazzup with that?

Here’s a letter I got from Meghan:

Gail, I’m desperate for help. My parents are almost ready to retire and they’ve just remortgaged their home for the third time to pay off their credit cards and line of credit. I don’t understand why the bank keeps giving them more credit when they’re eating away the value of their home and will have less income soon. My mother has worked her whole life and hasn’t got a penny saved. My father has a small pension from work, but not much else. And with the latest remortgage, they’ve wiped out their equity. I don’t know how they’re going to manage, and I’m desperately afraid it will my myself and my brother who have to step in and support them. I’ve got three kids of my own and my brother is doing okay, but neither of us have a lot of extra money. What can I say to my parents to get them to realize that they’re going to be in a huge mess if they don’t stop spending all their money.

And my response to Meghan:

M’love, I am so sorry that you are having to deal with this. I know you love your parents and I know you feel responsible for them, but you are not. You’ve got to follow the Gail Rule that says, “Don’t Put Yourself at Risk.” You and your brother aren’t responsible for your parents. They were supposed to take care of themselves. It’s one thing to struggle to help if they hit the wall through no fault of their own – sickness, tragedy, and the like. But when parents have spent irresponsibly, it is not up to their children to dig them out of the crap. Your job is to take care of yourself so you don’t end up causing your children this kind of worry. Take care of your kids until they’re old enough to take care of themselves because that’s your job too.

You can empathize with your folks, “Yes, I know it’s hard to manage on so little money,” but keep your hands out of your pockets. This is not your problem to solve. Your parents may have to move someone less expensive. They may have to work longer. They may have to learn to live on far less than they let themselves get used to. Those are their lessons, not yours.

This is a fairly common theme amongst the letters I receive from y’all. You’re desperately afraid for your elders, and you’re sick to death watching them go deeper and deeper into debt. It’s too bad. We often think that it’s our children we have to protect, but sometimes it’s the very people who we’ve counted on to protect us that are making a mess of their lives.

Of course this couldn’t happen if lenders were still looking at Capital when granting credit. If the expectation was that people’s net worth should be going up, as opposed to being eroded by rampant consumerism and irresponsible use of credit, they wouldn’t qualify for that refinance, their cards would clear, and they wouldn’t be able to dig themselves even deeper into debt. Thank you lenders!

If you’re sick to death of the irresponsible lending that’s proving to be the downfall of the next generation of retirees, it’s time to shout. Join School Lenders on Facebook. Send your letter off to your member of parliament. Spread the word. Tell friends and family. It’s time to insist that lenders learn how to lend responsibly.  Next week: The last of the 5 C’s.

Okay,  I want to do a count. If you’ve sent your letter to your MP, simply leave a “YES” here. If you also want to comment, leave a separate comment. I’ll draw one name from the “YES”s for a copy of Debt-Free Forever. If you haven’t sent your letter to your MP, what’s stopping you? Please, please take the time to do this. Ten minutes from your life is all it will take. Enough letters WILL make a difference.

The 5 C people are most familiar with is Credit History.  I am constantly surprised when I hear from people who are in a bind because they have no credit history. This is something we associate with older, widowed women who have been cared for by loving, controlling spouses. But not having a credit history isn’t the domain of slightly out-of-touch women; there are men out there who haven’t got a clue because their wives do EVERYTHING. And it isn’t the exclusive territory of our elders; there are young professionals who haven’t bothered to establish their own credit identities.

Your credit history is important because lenders follow the rule, “History repeats itself.” They want to see how you’ve behaved in the past because they believe that’s how you’ll behave in the future. That’s why when you mess up it can haunt you for a long, long time.

Once upon a time lenders also used your credit report to check up on you to see if you were being completely truthful about what you were telling them. Since your credit report has heaps of info on it, from where you live and have lived, to where you work and have worked, to if you’ve got dependents, lenders could use your credit history to verify the information you were giving them. Not so much anymore. Because the credit score is the go-to source for granting credit (damn! I hate that!), I’ve met lenders who can’t read a credit history properly! OMG!

To build a credit history you have to get your hands on some credit. But getting credit is only the first step. How you use that credit is the real test.

1. Pay all your bills, including your cell phone and utility bills, on time. Setting up pre-authorized payments is a great way to ensure payments are made on time.

2. Avoid applying for credit too often. Repeated requests for credit may be interpreted as a sign that you’re in trouble and need a way to cover your butt.

3. Charge regularly and pay off in full.  Responsible on-going use of credit will produce a good credit rating. Just having your card sit in your wallet does not.

4. Don’t over-expose yourself. Having multiple forms of credit with small balances can add up quickly and become unmanageable.

5. Don’t use credit to pay off credit. Taking cash advances on one card to make payments on another means you’re in over your head. Ditto using your Line of Credit to make your payment on your credit card. Cut back on your spending, pay off your debt and get back to the business of using credit to keep your record active and healthy, not to spend money you haven’t yet earned.

Check your credit history at least once a year. Twice a year is better. And since you can get a free credit report from each of Equifax and TransUnion just by writing in to request it, it doesn’t have to cost you a cent. Look for errors or signs of ID theft.  My friend Tash found that her credit history had been mixed up with someone else’s, which presented problems when she went to get a mortgage. Make sure that if you find an error, you get it corrected lickety-split. And you’ll have to follow-up and follow-up. Don’t assume the other guy is looking out for your best interests. It may take several calls to get an issue cleared up.

Have you joined School Lenders on Facebook yet? Have your sent your letter off to your member of parliament? Spread the word. Tell friends and family. It’s time to insist that lenders learn how to lend responsibly.  Next week: More about the 5 C’s.

Once upon a time you had to be of sound character for any lender to consider giving you money. Back when credit was a tool (as opposed to the commodity it has become), lenders looked closely at your ability to get and keep a job, stay put in one place for a while, and repay past loans.

In lending terms, Character refers to your intention to repay the loan. Lenders used to learn a lot about your Character during the loan interview. With the advent of the credit scoring system, Character seems to have become moot.

A case in point: Joseph is a family man with three kids and a wife who has been off work for almost a year with their youngest. Without her full income Joseph has found it hard to make ends meet. Gina hasn’t really changed the way she spends money and Joseph feels he should be able to provide for his family.

Joseph makes his minimum payments on his two credit cards every month, not a penny more. It’s all he can manage. When a third card was offered, he accepted with a sigh of relief using cash advances on that card to make the minimum payments on the other two. When he found himself pretty close to his credit card limit on his third card, he applied for and received another card. And then another. And then another. And then another. And then another.

In no sensible world should Joseph have been able to qualify for all that credit. But because only the credit score was being used to grant him access to more credit, because neither his Character nor his Capacity were being taken into account, he continued to receive more cards.

By the time I got to Joseph, he had 18 credit cards and access to over $100,000 in available credit. The man made $47,000 a year! How was that even possible?

Joseph was a man of sound Character. Well he started off that way. But in an attempt to provide the things he thought he owed his family, he dug a hole so deep there was no way out. Gina talked her mom into taking the kids two days a week and Joseph’s mom helped too so Gina could go back to work. Her entire paycheque went to paying off the debt. HER ENTIRE PAYCHEQUE. She was working for the BANK.

I’m all for personal responsibility when it comes to using credit. I sing that song loud and clear. But I also think lenders have a responsibility to lend wisely. And giving someone access to more credit than they can ever repay is in no world wise.

Have you joined School Lenders on Facebook yet? Have your sent your letter off to your member of parliament? Spread the word. Tell friends and family. It’s time to insist that lenders learn how to lend responsibly.

Next week: More about the 5 C’s.

My girlfriend, Jack, calls me up the other day to say she’s thinking of buying a house. Jack has been to see her friendly neighbourhood banker who has reassured her that she can most certainly afford to buy the house she’s looking at. Jack doesn’t have a downpayment, but that’s okay. The banker is happy to arrange her downpayment for her; she’ll only need 5% after all. And amortized over 30 years, the mortgage payment works out to be a little less than Jack’s current rent. It’s a good deal.

Jack: Don’t you say that you shouldn’t spend more than 35% on housing?

Me: Yup, that’s what I say.

Jack: My banker says it’s 44%.

Me: Really? That’s because your banker wants to bury you in debt.

Jack: Yeah, I’m not sure this is really such a good idea.

Me: What all is he including in your 44%? Just mortgage payments?

Jack: Mortgage and property taxes.

Me: What about utilities, insurance and maintenance.

Jack: No, none of those things.

Me: So with those things you’d be over 44%

Jack: I guess.

Me: Is that 44% of your net income or your gross income?

Jack: Huh?

Me: Money in the bank, Jack, or your annual gross income?

Jack: Gross, I told him I made $60,000 a year.

Me: But you also pay tax, have union dues deducted and a whole bunch of other stuff. You don’t take home $5,000 a month.

Jack: Yeah, I know.

Me: What do you take home?

Jack: About $3,200 a month.

Me: And your stupid lender thinks on a net income of $3,200 a payment as high as $2,200 would be okay?

Jack: It does sound kind of weird when you say it that way.

Me: So are you going to buy the house?

Jack: I dunno. I’m thinking about it.

Me: Y’know, even if the dope calculated it on your net income, you’d have just $1,800 left a month to cover your transportation costs, food, house insurance, maintenance, and everything else.  Didn’t you tell me that with your car payment, insurance and gas you were spending way too much on your car?

Jack: Yeah, with all my commuting it’s about $800 a month.

Me: Okay, so that’d leave you with $1,000 for everything else.

Jack: Doesn’t seem like much, does it?

Me: Hey, it depends on how important owning a home is to you. Far be it from me to tell you what to do. You never listen anyway (with a smile.)

Jack: Well, I’ll think about it some more.

Clearly the lender is over-estimating Jack’s Capacity to repay the loan. Capacity is one of the 5 C’s of lending (which lenders seem to be totally ignoring these days) and it measures your ability to actually get the debt GONE (as opposed to just making minimum payments). Lenders are supposed to weigh the amount of discretionary income you have to repay your debt. And they’re also supposed to look at Capacity based on the term of the loan you’re taking and your other obligations like family responsibilities and other existing debt.

Once upon a time lenders used to insist on a Total Debt Service Ratio (TDS) of about 30%. But with the fight for market share and the increase in housing costs, that’s gone out the window. Sadly, our incomes have NOT kept pace with the rise in housing costs, and so TDS levels have increased… not really a good idea if you want to also be able to save for the future and have a life right now.

The industry is paying a lot of lip service to “financial literacy” these days. And Credit Education Week is just one more example of the lip service. After all, if banks were serious about ensuring that customers were building financially sound foundations, they wouldn’t be offering them credit that would make that foundation crack with the smallest change in personal income or interest rates, would they?

Have you joined School Lenders on Facebook yet? Have your sent your letter off to your member of parliament? What are you waiting for?

Next week: More about the 5 C’s: Character.

Some of us have no tolerance for debt. My personal debt ceiling is zip, zero, zilch. I didn’t get my first credit card until I was in my late twenties. And I was raised by a mother who drilled into me that debt was deadly. But in a world where people have grown up surrounded by plastic, where they’ve watched their parents use credit to buy everything, and where they’ve been handed more rope than they could have imagined, is it any wonder some people haven’t figure out their debt ceiling?

And so off they go charging through life. When a card fills up, they apply for and get another. Eventually they get a credit line or two. And, of course, they have overdraft protection. Some wind up at the pay-advance store. All the while they hike higher and higher up Mt. Debt until eventually they run out of air.

So, do you have a debt ceiling?

What do you think contributed to you having a debt ceiling?

If you don’t have a debt ceiling, why do you think that is?

Do you think that keeping your debt in different piles helps to make you feel less close to your debt ceiling?

Have you ever added up your total debt? How did you feel?

What would you be prepared to go into debt for?

What would you NOT be prepared to go into debt for?

Do you feel like you’ve used too much credit?

If you had it to do over, what would you differently when it comes to using credit?

This is the state of our lending these days. I’m hearing stories of children in high school being shipped credit cards once they turn 18. Lord love a duck! It’s got to stop.

And so I’m asking for your help. I want you, all your friends, your family, your co-workers, anyone who gives two hoots about fixing our very broken lending system to pay attention.

Over the next six weeks, I’m going to be talking about what good lending is supposed to look like. And I’ll share your stories about crappy lending experiences. I want it all to culminate during Credit Education Week, which is November 13-19 this year.

Ah, Credit Education Week: the week given over to helping we bears of very little brain understand how to better use credit.

Let’s turn this puppy on its head. This year, we The People are going to use Credit Education Week to School Lenders.

If you want to be part of the effort to School Lenders, join the School Lenders group on Facebook.  Then stay tuned for announcements about Twitter and Facebook chats leading up the School Lenders Week. Get out your pen and write to your MP to demand a change to the legislation. Tell everyone you know, and tell them to tell everyone they know, that it’s time to make lenders stop lending irresponsibly!

During School Lenders Week, I want Canadians to commit to not using credit for anything during that week. Yup, that means it’ll be a cash-only week.  You can do that, right?

If banks put profits before people, it’s time for people to hit banks where it hurts most: their pockets. By forgoing credit for one week, lenders will not only lose all the new charges for that week, they’ll lose all the retailer fees for processing credit card payments. You betcha that’s big money.

If you’re ready to make a difference, all you have to do is:

•          Commit to not using your credit for one week (Nov 13-19),

•          Join the School Lenders Facebook group to show your support

•          Write to your Member of Parliament and tell them you want new legislation that ends the use of the credit score as a credit-granting tool. There’s a sample letter under “Resources” entitled School Lenders.

•          Spread the word to family, friends, co-workers, and whoever else will listen.

The message we want to send is that we’re not happy with the way lenders are doing business. We’re not happy with the way the credit score is being used. Get back to good lending!

Next week: More Schooling Lenders and the 5 C’s.

You have all your equity tied up in your home, which is a “non performing” asset, and so you aren’t diversified enough. We can take $100,000 line of credit out on your home and use that money to buy a balanced portfolio that’ll increase your diversification. You’ll be borrowing at 3%, but your portfolio will be earning you 6% 7%, 8%, 9% or even more, so you’ll really be making at $100,000 work hard to make you rich!

It sounds so good, doesn’t it? Makes perfect sense when the person “in the know” says it like it’s the most sensible move you could make. And yet, people’s little red flags are all over the field because they write to me and ask me to say, “Yah! DO IT!

You can’t trick me!  If you’re writing to me to check it means you’re not convinced this is the best idea.

And you’d be dead right.

The next time someone comes a’callin’ with a great investment spiel about how you can use your home equity to diversify your investment portfolio and make more money, ask some questions.

•          How likely is it that you’ll be able to earn the return being quoted? Historically, you have to be fully invested in stocks to earn a return of 9%. Are you ready to take on that much risk? Do you have the time (and guts) to wait out the dips that come with equity investing? If there are any fixed-income investments in your portfolio, borrowing to buy them makes no sense because their returns are likely to be so very close to what you’re paying in interest on the loan.

•          How long will the loan stay at the interest rate quoted? Sure, you can get a loan at 3% today, but that rate will fluctuate over time. If the rate goes up 1%, that’ll eat into whatever return projection you’ve been given. And it’ll eat into your cash flow – the money you’re using to have a life – unless you choose to sell some of your investments to cover the higher payments.

•          What does a “non-performing asset” actually mean? If you’re living in a home, it’s providing you with shelter. Real estate may not be ratcheting up as quickly as the stock market, but you got to House Rich through your home’s appreciation over time.  And, for goodness sakes, you’re living in it! That’s got to be worth something. I do agree that having a home as your only asset is not as smart as having a more diversified portfolio, which is why I tell people not to delay their long-term savings (RRSPs, TFSAs) for the sake of mortgage pay-down.

•          If you stick $100,000 in the market all at once, doesn’t that go against the concept of “dollar cost averaging?” It sure does. You be better off keeping your sticky fingers off your home’s equity, and using the money you would have to cough up to repay the line of credit you’re being encourage to take out to invest monthly.

•          What’s the downside of “leveraging”? When you borrow against your home to invest, it might be positioned as “diversifying”, but it’s actually “leveraging”.  The upside of leveraging is that you can make more money by using borrowed funds to increase your returns. The downside is that you can lose your shirt. Are you ready for the downside?

If you’re wobbly on the math you’re being shown, if you’re not convinced this is the right tactic for you, if you’re being “sold” this idea, step away from the table and take some time to think. You should only use your home equity to invest if you are absolutely convinced you’ll make money. Otherwise you’re putting your home at risk for something you may not really understand.

Overdraft protection is sold to people as a way to ensure that if your account runs dry your debits won’t bounce. OD can be useful for people who occasionally get to the end of the money before they get to the end of the month. I recommend it to people who are going through a big change of some kind: moving, divorce, widowhood. With lots of balls in the air, a slip at the bank could happen if you end up not having enough money in your account for a pre-authorized bill. Having OD means no NSF fee because a payment is declined. And if that payment was to your credit card company, your credit history won’t get bruised resulting in a lower credit score and higher interest rates.

While overdraft protection is positioned as a big ol’ favour the bank is doing you to ensure you don’t bruise your credit history, the bank is, in fact, selling you credit. You’ll pay for the privilege of using that credit when you run short of your own money both in fees and interest charges.

But make no mistake, the bank considers overdraft protection a privilege, one it can withdraw at a moment’s notice.

For a lot of people, having overdraft means they can totally ignore how much money they have in their accounts because OD is their safety net. Some people live in overdraft, treating it like a line of credit and never being on the plus side for months on end. If you’re this can of OD abuser, don’t be surprised to find your bank accounts frozen because the bank wants its money back and it’s not taking “no” for an answer. You won’t be able to make deposits, withdraw cash, or write cheques. And the next thing you’ll know, your “debt” been sent off to collections for being delinquent.

Can the bank do this?

You betcha buba.

Remember that overdraft agreement you signed? Didn’t read it? If you had you’d know that if you stay in overdraft too long banks can suspend your overdraft privileges and freeze everything until you make good. Too long can range from days to up to six months, so every bank is different. And banks can get pretty heavy-handed when they decide to enforce the rules.  They’re making the point that overdraft isn’t a line of credit. And if you treat it as such, don’t be surprised if you get a slap on the wrist.

‘Course, if overdraft is only supposed to be a short-term solution to cover the odd misstep, one wonders why a customer would ever need coverage at the limits many banks hand out: up to $10,000. And if OD is only supposed to be a short-term solution, why have banks let so many customers live in overdraft for so long? Could it be the whopping interest and fees – sometime higher than credit card rates – they’ve been getting?

Don’t use your overdraft protection as a license to ignore your cash management. The answer to running into overdraft is not overdraft protection, it is to better manage the money in your account so you don’t try to spend cash you don’t have.

Get yourself a notebook. When you put money in your account, add it to your balance. When you spend money from your account (be it a cheque, bill payment, a debit card transaction, or a cash withdrawal) deduct that amount from your balance. Keep your eye on the bottom line.

If you think that sounds like too much work, you’re a dope. You’d work at least this hard to find where gas is selling for a penny less, or where tuna is two for $1.39, or where wings are all-you-can-eat for $3.99. Staying out of overdraft is one of the best deals going.

If you need more pep than water will produce, you can always jump on the energy drinks bandwagon. Each time I’d drop Malcolm at school and watch the kids walking by with tins of Red Bull I wonder whether their parents know what they were putting into their bodies. Where are they were getting the money? Since 2002, energy drink sales rose from $1.2 billion and are expected to hit almost $9 billion by next year. Red Bull is at the front of the pack, followed by Moster and Rockstar. Sobe has 4 drinks in the top 15 energy drink brads. Wowza!

Can’t stomach that much caffeine all at once? Maybe you’d rather sip yours hot. The U.S. coffee sales market is an $18 billion a year biz, and the average coffee drinker downs just over three cups a day. It’s been projected that there will be $50,000 + coffee shops in North America by the end of this year. Americans alone consume 400 million cups of coffee per day making the U.S. the leading consumer of coffee in the world.

Drinking water is one of the best ways to lose weight, so say the experts. And if you’re flagging because you haven’t eaten enough to keep a butterfly alive, you can always grab a cuppa coffee or a Red Bull, I suppose. The thing about diets that make me scratch my head is that with all the plans out there that work wonders, why do we still have any fat people left? From Atkins to South Beach, there’s a diet for everyone. Some plans will even deliver the food you should eat directly to you no matter where you are.  The industry is so huge – programs, books, videos, foods and beverages, supplements and pills – that nobody actually knows how big it is. But Nestle Nutrition, which manages Jenny Craig, posted sales of over $9 billion in 2009. Nestle bought Jenny Craig for $600 million in 2006, so I think they’ve made their money back. Hey, that’s just Jenny Craig.

Right along with all the money people spend to not be fat anymore — when really, if you just stopped spending money, that’d work too — [yeah, yeah, I’m fat, but I don’t diet!] , comes all the money people will spend on exercise equipment that then become clothes horses and dust catchers. Sure, the exercise equipment company guarantees your success for they’ll give you your money back. You’ll just have to disassemble the sucker and pay for shipping 800 lbs of deadweight. Hmmm. Exercise equipment sales is a $4.22 billion biz in the U.S.

We also dropped more than $12 billion on exercise shoes in 2008. As if what some people will pay for their own shoes isn’t enough to take your breath away, what we’ll pay to keep our pooches shod should. When I was shooting one of my Princess who had spent way too much for a dog she couldn’t afford, we shot in a doggie boutique. I was gobsmacked at the price of doggie coats and booties. I get that a pet can be like a child. But dontcha know that most come with their own fur coats? So why do we pay to have someone trim off their fuzzy and then pay someone else to make them a new one? In 2010, American households spent over $49 billion on pet-related expenses.

I don’t suppose any of the people who are using any of these products have any debt. Nope, I don’t suppose they do.