Financial Literacy Series 101, Preparing for a Loan Appointment Vol 2

The day has come when you need to make an appointment to see your friendly credit union Financial Services Officer. Maybe it’s a car purchase, home renovation, or some other purpose to borrow; nonetheless some people view the whole ordeal as a stressful experience. Some people would say it is the fear of being turned down for the request. I strongly believe that the stress stems from being unprepared, and not knowing the lending process. If you are prepared for the experience you should increase your chances of knowing your borrowing position prior to making the appointment. So let’s take a look at what you should know about the applying for a loan with the goal in mind that your next experience will be a positive one.

First and foremost you need to understand your affordability position. Most lending institutions use a quick formula to determine if you can afford to make your payments. Simply write down all your monthly financial obligations from creditors on a piece of paper. This would include credit cards, mortgage, personal loans, and lines of credit. If you are unsure what your payment is on a credit card or line of credit, just multiply your balance by 3% to get a monthly payment. This calculation is used by most financial institutions. Once you have all your monthly debt payments added together, add in an additional $100 a month for living expenses. If you rent, also include this in your total. Ensure you are thorough with your debts and do not leave any out, as your financial institution will order a credit report and it will list all your debts. They will use the information in the credit bureau for their calculations, so if you have co-signed for a loan, ensure you also include that. Now that you have your total monthly financial obligations calculated, you need to focus on your monthly income. If you have a full time job that provides you a steady income, then a T4 or letter of employment from your employer will provide you with your monthly income. If you have fluctuating income from seasonal work, commissions, or various employers for example, dig out your notice of assessments from Revenue Canada for the past two years. Take your average total income for the year and determine your monthly income. So we now have the total monthly income and the total monthly financial commitments.  Our next step is to calculate a new payment of the debt you are applying for. Visit the Leading Edge Credit Union calculator tools on the website at:

https://www.lecu.ca/Home/ToolsAndCalculators/Calculators/LoanCalculator/index.jsp and input the appropriate data to come up with a new loan payment.

Category	Value	Notes
Monthly Income	$3000	Employment income from all sources
Monthly Debt payments	$800	Credit cards, loan payments, mortgage
Monthly living allowance	$120	Costs considered for daily living costs
New loan payment	$200	Car $10000, 5 years at 8%
Total Financial payments	$1120
Total Debt Service Calculation	37%	Total financial payments divided into income

As indicated above in the chart, the formula used by most financial institutions is called the Debt Service Ratio (DSR) calculation. It is calculated by dividing the total financial commitments by the total income. A benchmark of approvals is normally set at 40%. In other words, you should not have more than 40% of your gross income dedicated to debt payments. When you complete your calculations and if your DSR is over the 40% mark, your Financial Services Officer still may have solutions for you. In the case above this member has a DSR of 37% which is in line with the approval process.

So now you have some idea on your ability to qualify from an affordability perspective. Again the affordability is based on a formula and not your personal thoughts on money management. Certainly there are those individuals that can operate on a DSR of 50%, as well as there are those that cannot function on a DSR of 20%. The 40% is a benchmark that the financial institution will use. The next thing you want to prepare is a list of your assets. Assets are defined as positions that yield some financial value and in most cases can be used as security on a debt. Homes, investments, automobiles, recreational vehicles, and life insurance policies are just a few examples. If your intent is to use one or more of the assets as security, in preparation for the appointment ensure you bring along proof of ownership. Registration documents are the easiest form of proof of ownership and it will also speed up the approval process.

In speaking to Lisa Purchase and Donna Bailey who are certified Financial Services Officers (FSO) in the Port aux Basques location, they identified a couple of other important points. They suggest that you also prepare some questions prior to coming to an appointment that you would like answered. This becomes very important when you want to discuss a mortgage because it is more complicated. Having questions prior to the meeting will ensure you have a good understanding of what is being offered by your FSO. They also suggest that you bring identification as today’s legislation requires photo ID be presented before a loan can be processed.

At our credit union, rest assured that the staff is working for you. They are trained to provide you wise financial advice and guidance. We want each and every loan appointment to be comfortable and respectable. Hopefully the information contained in this blog will enhance your next experience. If you are a first time borrower, hopefully this information will take any edge off your feelings towards loan appointments.

Financial Literacy Series 101, Understanding Your Credit Bureau

What is the first thing that comes to your mind when you hear Credit Bureau? Credit Bureau or report is a document that is mostly used by financial institutions for the purpose of determining whether to grant credit to a consumer. The report is also used by individuals themselves to review and identify their credit rating. The credit reports purpose is to outline a financial history trend and also take into considerations such as home ownership and employment history with the intent of creating a score to be used for credit granting purpose. Financial institutions are heavily influenced on the content within the credit report especially the credit score. The credit score is tabulated after it takes in a series of information such as;

• Types of credit in use
• Payment History
• Amounts Owed
• New Credit
• Length of Credit History

Although each of the above categories is assigned a different weighting ratio they all are important. For example the biggest influence on your credit score is the payment history of your credit. The types of credit in use would not skew your score in comparison to payment patterns. So why is the score important? Most financial or credit granting institutions use the score as a quick way in determining if you are credit worthy. The higher the credit score, the more likelihood of obtaining the requested credit. Equifax is the most popular credit report provider in Canada. Leading Edge Credit Union uses their services to produce credit reports when required on our members. Equifax uses a scoring matrix that uses a numeric scheme of 350-850 with 850 being the highest possible credit score. Each financial institution chooses their own level of approvals in which they would grant credit. Some institutions use only the credit score in determining approval while others use additional details. At Leading Edge Credit Union the credit score is combined with a series of information and is not the only source of determining if credit will be granted. In reference to a good score, 650 and above would look very favorable from our organization perspective. We also look at a person's character when determining to grant credit. Many institutions have moved away from looking at how a consumer has paid in the past or their relationship with the individual and focused solely on the credit score. If you apply for a prepaid cell phone for example the score will most likely be the only benchmark for determining if you are granted the phone.
What can you do to increase your score? Raising your score is bit like getting in shape; it takes time and there is no quick fix. The best advice is to manage credit responsibility over time and follow these simple tips;

1. Pay your bills on time. Delinquent payments have a major negative impact on your score.
2. If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.
3. Keep balances low on credit cards and other "revolving credit". High outstanding debt can lower your score.
4. Pay off debt rather than moving it around. The most effective way to improve your score is by bring your debt balance down, not transferring from one credit source to another.
5. Don't close unused credit cards as a short-term strategy to increasing your score. Owing the same amount but having fewer open accounts may actually lower your score.
6. Don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower your score.
7. If your new to credit, don't open a lot of new credit in a short time. Manage your credit over time to build your score.
8. Don't open new accounts that you don't need. Simply applying for credit for a purchase that you are not intending to purchase will lower your score. Shopping for a car, wait until you selected your car first before applying for the credit to purchase it. We suggest apply for a loan with us at LECU to get your approved amount, and then go shopping. Be careful however as some dealers will put your information through to their lenders creating inquiries which could lower your score. Bottom line, limit your inquiries!

Here are so more tips I found from our supplier if you want to check it out http://www.myfico.com/CreditEducation/ImproveYourScore.aspx
In conclusion, your credit score is a very important part of applying for credit. It is also very important to understand how you can manage your score. If you would like to obtain a copy of your credit report visit http://www.consumer.equifax.ca/home/en_ca

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 http://www.cbc.ca/news/business/story/2011/02/28/bankruptcy-statistics-hoyes.html 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 6^th and May 27^th, 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 cmunden@lecu.ca 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.