Friday, March 25, 2011

Financial Literacy 101 Series

In a recent report released by an Ontario Trustee firm which analyzed 8000 clients that filed for bankruptcy, the statistics did not surprise me. We typically link a person who would file for bankruptcy as being unemployed and experiencing a financial hardship due to loss of employment. However in this particular report 80% of the applicants were employed at the time of filing. The most startling statistic is that 55 percent of the applicants admitted to overextending their credit and poor financial management. To put things in perspective, consider that this particular firm 4400 of the 8000 applicants mismanaged their finances which lead to the bankruptcy findings. The Federal Government held public consultations between April 6th and May 27th, 2010 with an appointed Task Force to determine how best to curve some startling statistics on financially literacy. The task force defines "financial literacy" as having the knowledge, skills, and confidence to make reasonable financial decisions. It is interesting, I attended a conference about three years ago when a speaker described that people if given the opportunity have difficulty making financial decisions even when the obvious pitfalls present themselves. He was speaking of the environment in the United States that allowed people to take out mortgages even when people could see the risk associated with taking out the mortgage. In Canada we have legislation and policies that are more stringent to prevent people from taking out products that could impair their financial position. However, the arena is still very open for numerous financial products to allow people to fall into a financial trap unless they have the appropriate level of financial literacy. In comparison, the United States allowed mortgages to people that had no down payment, extended mortgage terms up to 40 years, low introductory rate offers, and not necessarily the income to support the debt. Although a person with high financial literacy could look at this particular mortgage product and make the assumption that they shouldn't buy a home under these conditions, many Americans proceeded to take advantage of the lax rules and jump in without understanding the consequences. The speaker mentioned above, highlighted that despite the pitfalls, the fulfillment of the goals overshadowed rational thinking. Consumers were more concerned about owning a home, then paying for it. In Canada, credit card debt is soaring at an alarming rate. Despite the fact that the average interest rate is 19% of most credit cards, people overspend because the goal of obtaining something, overshadow the cost of obtaining it.

The Federal Government task force released some statistics that indicated 57% of Canadians cannot answer a question about the contents of a credit report. They also indicated that 33% of Canadians don't understand the impact of inflation on their savings and only 35% know that investments in the stock market are not insured. It is obvious that the majority of Canadians are suffering from poor financial literacy. As a Credit Union it is our duty to protect the interest of our membership. We have trained staff that analyzes all the details provided by our members to ensure we provide the most accurate advice. I encourage all the staff to remember that we are the experts and it is our duty to educate the membership on making wise financials decisions. In some cases this contravenes what a member wants to accomplish. As a lender there is numerous times that credit has to be declined and the feeling is certainly not satisfying, but it is the best decision at the time, despite if the member agrees with the decision. As a practice our credit union reviews those loans that have filed for bankruptcy to look for patterns. The majority of the loans indicate large loans with high payments and members with unsecured debt such as credit cards and lines of credit. Poor financial literacy is evident with the inability to understand the impact of making poor financial decisions. Over the next few weeks I will update this blog with very simple easy to understand financial literacy topics for the benefit of our membership. I would also encourage members to send me questions and emails on particular financial decisions they are contemplating or simply asking for guidance. Email all inquires to and I will ensure that all identities are kept confidential however share the responses on this blog. Stay tuned as the first topic will be on understanding your credit bureau. I also encourage you to become a follower of this blog by clicking the right side of this page. As a follower you get notified of updates automatically.

No comments: