Things To Know About Consumer Proposals in 2020

Even before the coronavirus pandemic hit, there were mounting concerns about personal debt levels in Canada. While borrowing money can be part of good financial management, debt becomes a problem when it starts piling up and outpacing income.

So, what does the debt situation look like in Canada? The Canadian household debt load has been steadily rising since the early 1990s. Debt levels have spiked more recently, due largely to lower interest rates. This has been especially reflected in high levels of mortgage borrowing. What’s important to note, though, is the ratio of borrowing to household income. A recent report showed that household debt is at $1.76 for $1 of disposable income. Furthermore, Canadians are spending a record 14.96% of their income on debt payments, half of which is being directed towards interest.

Insolvencies are also on the rise among Canadians, particularly among individuals. According to Statistics Canada, consumer insolvencies increased by 13.4% in the past calendar year. It may come as a surprise, then, that the number of bankruptcies have actually decreased by 1.2% during this same period. This downward trend in bankruptcies started in 2009 and can mostly  be attributed to more favourable global economic conditions.

But there’s another reason why bankruptcies have been continuing to decline: consumer proposals. More and more Canadians are pursuing consumer proposals over bankruptcy to deal with insurmountable debt. In fact, consumer proposals increased by 17.9% in the past calendar year, coming to a total of 83,703.  

Why are More Canadians Choosing Consumer Proposals?

Both consumer proposals and bankruptcy result from insolvency, yet consumer proposals enable individuals to keep their assets, more quickly pay off debt and do less harm to their credit score. This is often appealing to those with higher incomes and with valuable assets. The bankruptcy route can result in surplus income payments and loss of assets.

A consumer proposal is a debt relief program authorized by the government of Canada available to individuals looking to avoid bankruptcy. A Licensed Insolvency Trustee (LIT) works on an individual’s behalf to negotiate with the individual’s creditors a percentage of debts to be paid. This amount is distributed over monthly payments usually spread over a period of five years. You can see why this may be an attractive option for many overburdened by debt.

Situations of insolvency, however, still cost enormous amounts of stress, time and damage to your credit rating. In a climate of alarming debt rates and worrisome debt-to-income ratios – and significant societal consumer pressures – how does one avoid hitting the red?  

How to Avoid the Downward Debt Spiral

It’s important to approach financial trends, including the spending and borrowing happening around you, with a healthy amount of caution.

For example, low interest rates may make a mortgage suddenly possible, but does that mean it makes sense for you to buy that house? Make sure to be aware of what percentage of your household income will go towards mortgage payments and interest and how long you will be paying your mortgage. And continually analyze your spending habits. Are you spending an appropriate percentage of your income on rent or mortgage payments, loans payments and personal expenses? Is there enough left over for your slush fund and your retirement savings?

Even if you don’t think you’re in a financially precarious place, it’s a really good idea to seek some solid financial planning advice. Maybe you’re doing ok, but some ongoing habits – or an unexpected major event, like we’re currently seeing with COVID-19 – could put you in a tough spot.

If You Find Yourself in Consumer Proposal…

As we explored above, insolvency and consumer proposals happen to many Canadians. And, they can happen to anyone – even those with high incomes and those who are careful with their money. Major events can happen that cause a cascade of financial duress, and eventually, unmanageable debt.

If this is you, there is good reason to foresee a better financial future. You can take action to boost your credit, save for the future and improve your financial situation right away. Doing so will maximize your short- and long-term financial health and help you move on with your life.

Make Credit Climbing Your Goal

Your credit score is like your financial report card and affords you the opportunity to qualify for loans, credit cards, a house rental and sometimes even a job. The credit scores among those in consumer proposal, unfortunately, drop very low. Nevertheless, it’s especially important to make improving your credit score a top priority during consumer proposal. By building a positive payment history during your consumer proposal, you’ll be poised to maximize your credit score when you complete your proposal.

It’s important for everyone, and particularly those in proposal mode, to keep on top of their bill payments, including to your proposal. Ensure, as well, that you avoid making out cheques with insufficient funds. It’s also a good practice to monitor your credit score and rating on an ongoing basis. This way, you can detect upward and downward movements in your score, as well as identify any possible errors. You can obtain a free copy of your credit report once a year from Equifax and TransUnion, Canada’s two credit bureaus. Canadian companies such as Mogo, Credit Karma, and Borrowell can also send you free monthly updates on your credit score and rating.

Consider a Credit Accelerator Program

If you’re eager to pay off your consumer proposal in less than five years and are interested in improving your credit and building your savings, consider the Climb Accelerator Plan.

The plan is geared towards helping those in consumer proposal boost their credit rating, while building up some savings that can be used to pay off your proposal sooner. Climb works with you to develop an early repayment goal customized to your budget, payment schedule and financial goals. You make pre-authorized weekly, biweekly or monthly payments that Climb reports to Equifax and TransUnion. In the meantime, your money is stored in a secure account and then returned to you as a lump sum at the end of your term.

Conclusion

With consumer proposals steadily on the rise in Canada, and more on the horizon thanks to the devastating financial impacts of the coronavirus pandemic, it’s important to be prepared and know your options. A consumer proposal is a serious situation, but it’s one you can recover from with the right actions.

Still have questions? Reach out today and our team would be happy to provide you with a free credit consultation.

Author: Climb

What’s a Consumer Proposal and How is it Different from Bankruptcy?

You may have heard the term consumer proposal. But do you understand what it truly means? And do you know how it’s different from a bankruptcy?

Both consumer proposals and bankruptcies help you get rid of debt and assist from a monthly cash flow perspective. However, the way they achieve these outcomes is very different.

In this blog post, we’ll take a look at exactly what a consumer proposal is, how a consumer proposal works and why you might benefit from filing for a consumer proposal over a bankruptcy.

What’s a Consumer Proposal and How Does it Work?

A consumer proposal is a formal arrangement that’s negotiated with the creditors to whom you owe money. This legally binding agreement is negotiated and administered by a Licensed Insolvency Trustee (LIT). A consumer proposal is another way to handle debt besides filing for bankruptcy. It protects you from creditors who are seeking immediate debt collection, sometimes via legal action.

When filing a consumer proposal, you should work with an experienced LIT you can trust. Together, the LIT will work closely with you to come up with a proposal your creditors are likely to accept. At its core, the consumer proposal can:

  • Pay your creditors a percentage of what’s owed to them;
  • Lengthen your payment schedule (to a maximum of 5 years); or
  • A combination of both.

When filing a consumer proposal, instead of paying creditors directly, you’ll make the payments through the LIT you’re working with. The LIT will then pay the creditors based on the agreed upon repayment schedule and amount in the consumer proposal.

Creditors will usually accept a consumer proposal if they believe they’re likely to receive more money than they would under a bankruptcy.

What are the Benefits of Filing a Consumer Proposal?

Are you considering filing for a consumer proposal or bankruptcy, but you’re not sure which one to go with? Here three key benefits of filing a consumer proposal over bankruptcy:

1. Avoiding Bankruptcy. 

A major benefit of filing a consumer proposal is that you’re not filing for bankruptcy. A consumer proposal offers you short term debt relief, plus a better opportunity to rebuild your credit score over the long term.

For instance, the debts included in your consumer proposal filing will be marked as “R7” or “I7” on your credit report. An R7 or I7 means that you have compromised or settled your debts and it remains on your credit bureau report for 3 years after your proposal is paid in full. Bankruptcies, on the other hand, result in your debts being marked as an “R9” or “I9”, which is the worst possible status on a credit report. An R9 or I9 represents a bad debt write off, meaning you defaulted on your debt. And an R9 or I9 will remain on your credit report for 7 years from the last date of any activity or payment on your outstanding debt.

2. Better Cash Flow. 

Since the amount of time you have to repay your debts may be extended – or the amount of money you’re required to repay may be reduced – your cash flow will almost always improve. Interest also stops accruing when you’re in consumer proposal, helping you save on the total amount of interest you’ll pay.

3. Keep Your Assets. 

One of the biggest concerns many people have when they file for bankruptcy is that they’ll lose the assets they’ve worked so hard to acquire. Unlike a bankruptcy, where you may have to turn over the keys to your home and car, a consumer proposal typically protects those assets from being seized by creditors.

What Happens Once You’re in a Consumer Proposal?

There are several things that will happen when you enter into a consumer proposal.

First, your LIT will file your proposal with the Office of the Superintendent of Bankruptcy (OSB). Once your proposal is filed, you stop making any further payments to your creditors. Any collection or legal actions initiated by your creditors (including collection calls, wage garnishes or court actions) will cease immediately.

Next, your LIT will submit the proposal on your behalf directly to your creditors. The proposal will include a detailed report about your personal situation, as well as the source of your financial difficulties. Your creditors will then have 45 days to either accept or reject the proposal. If they accept it, you will begin making payments according to the terms you have agreed to.

Can You Get Out of a Consumer Proposal Early?

Luckily, if you have the ability to, you can make additional payments towards your consumer proposal to pay it off earlier.

At Climb, we’ve designed a custom program, called the Climb Accelerator Plan, that provides the option for clients in consumer proposal pay if off earlier, while also building their credit score.

If you’ve recently filed a consumer proposal, our plan may be right for you. Learn more about the Climb Accelerator Plan today.

Updated: March 27, 2020
Originally Published: February 12, 2019

5 Common Credit Myths Busted

Wouldn’t it be great if all Canadians had an excellent understanding of credit scores? Unfortunately, that isn’t the case. With financial literacy lacking in the school system, most of the knowledge we receive about credit scores is secondhand from family and friends. Sometimes that information is right, sometimes it’s not.

Let’s take a look at some of the most common Canadian credit score myths and help dispel them once and for all.

Myth #1: I’ll Hurt My Credit Score by Checking It

This is false in most cases. If you’re checking your own credit score or credit report using a free or paid service, then it won’t affect your credit score. However, if you’re applying for a new credit card and the bank pulls your credit report, that can drag down your credit score.

That’s because there are two main types of credit inquiries, “soft” and “hard” credit inquiries. Soft inquiries like checking your own credit report aren’t noted on your credit history and therefor don’t affect your credit score, while lenders and credit card companies do a hard inquiry, which is tracked on your credit history, to determine how much credit they can offer you.

Too many “hard” inquiries can make it look like you’re shopping around for credit – which can be a red flag for lenders.

This brings us to Myth #2…

Myth #2: All Credit Reports Are The Same

In Canada we have two different credit bureaus: TransUnion and Equifax.

Consumers are typically listed with both, though the information can vary between the two depending on how the companies you do business with report credit and payment histories. You can get your free TransUnion credit report online here and your free Equifax credit report here. Both companies also offer credit monitoring, which can be a good investment if you’re concerned about identity theft or fraud.

Both companies also offer several different views or versions of an individual credit report to businesses. Depending which view a business is using, they may see a different score. This is true for free online credit scores as well, as Marketplace reported in October 2019.

Myth #3: I’ll Improve My Credit Score by Lowering My Credit Limit

Again, this is false in most cases. One important factor that determines your credit score is your credit utilization. That’s a fancy way of saying how much of your available credit you’re using.

A good rule of thumb is to keep your credit utilization below 35%. For example, if you had a credit card with a $10,000, you’d want to keep it below $3,500 (35 percent) at all times. When it gets above 50 percent lenders tend to get nervous that you could be running into financial difficulties.

Giving yourself some breathing room makes sense for most people, but if you’re someone who knows you’ll spend right up to your limit if it’s available, you might be better off with a lower credit limit. Just be aware it’s likely to hold back your credit score – although that’s better than having a large balance on your credit card next month!

Myth #4: I’ll Help My Credit Score by Closing Old Accounts

Do you have a credit card in your wallet that you haven’t used for a while? Your first instinct may be to close it, but did you know that could actually hurt rather than help your credit score? That’s right, if you have a long history of making your payments on time and in full, by closing this credit card, your credit score is likely to take a hit.

You may be wondering why. The reason is simple. The length of credit history is another factor that comes into play with your credit score. When you close an old credit account, you’re shortening the length of your credit history, so it’s best not to do in most cases. The only time it may make sense is if you’re barely using a credit card and it comes with a hefty annual fee. Otherwise, you’re most likely better off keeping it open.

Myth #5: When Does An Old Bill go into “Collections”?

Everyone knows that having an item in collections will have a seriously negative impact on their credit report. But we recently helped a client who had an item in collections – and she didn’t even realize it.

Because the debt was with an internal collections team and hadn’t been transferred to an external agency, she didn’t realize the overdue bill was now considered as “in collections”. But that was what the credit bureau was reporting, and what was holding her back from getting more credit when she needed it.

If you want to learn more about which credit myths might be holding down your credit score, contact one of our credit consultants for a free consultation. They can review your credit report with you and help you find the right tools to grow your score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

How Do You Protect Yourself in a Data Breach?

You’d like to think you’ll never be involved in a data breach, but the sad reality is that data breaches are happening all the time these days. A quick search online will bring up plenty of recent examples. Personal information that may be compromised in a data breach includes names, dates of birth, addresses, SINs and even credit card details. That begs the question, how do you protect yourself? Thankfully there are things you can do to be protect yourself if you’re ever a victim. Here are four simple ways to protect yourself in a data breach.

Fraud Alert

The first thing you can do is place a fraud alert on file with the credit reporting agencies Equifax and Transunion. A fraud alert is a great way to protect yourself in the event of a data breach. When a creditor pulls your file, they’re supposed to take extra precaution before approving your credit application. That means calling you on the phone to confirm your identity. This should help stop anyone who tries to a fraudulently use your personal information to obtain credit.

Credit Monitoring

While fraud alerts helps immensely, another way you can protect yourself is by signing up for credit monitoring. With credit monitoring, you can regularly check your credit history. Although it won’t stop fraud, it’ll help you spot anything suspicious. If you see anything fraudulent on your credit report, you can report it to the police.

Change Passwords

Sometimes it’s not just your name, address and personal details that are compromised. If you use your online password for more than one website, your other accounts could be compromised too if the fraudsters gain access to your email address or bank account. As such, it’s a good idea to change any of your passwords associated with the data breach. It’s better safe than sorry as the saying goes.

Credit Card Alerts

Credit cards alerts are another great way to prevent fraud. Usually there’s a bit of lag between when a data breach is discovered and when it’s made public by the company involved. As such, your credit card details may have been stolen without you even knowing it. However, by adding an alert on your credit card, you can help protect yourself. You can add an alert by text message or email every time someone makes a purchase on your credit card. If it’s too much, you can set it up so you only receive an alert for purchases over a certain threshold.

Most of us don’t check our credit card statements every single day, but by setting up alerts, you’ll know right away if someone is going on a shopping spree at your expense instead of days or weeks later.

Are you looking for other ways to protect yourself in the event of a data breach? Contact our offices today for some assistance.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Going Back to School Without Breaking the Bank

Can you believe it’s almost that time of year again? You know what time I’m talking about – the “most wonderful time of the year.” No, I’m not talking about the holiday season; I mean back to school.

While back to school can be an exciting time for parents, it can also be a costly time. The last thing you want to do is start the school year in debt, but with the list of must-haves for children getting longer and longer every year, keeping your back to school budget in check is often easier said than done. Thankfully it is still possible.

Here are some ways to go back to school without breaking the bank.

Plan Ahead

Did you know that people who go to the supermarket without a shopping list are more likely to spend more than those who go with a shopping list in hand? It shouldn’t come as a surprise. Those with a shopping list know exactly what they’re going to buy. They can get in and out, without the temptation to wander and wonder what they need.

You may be wondering what the supermarket has to do with back to school shopping, but the two have more in common than you think. Similar to going to the supermarket, you want to plan ahead for back to school shopping. Take the time to do an inventory of what your child already has. That way you won’t end up buying supplies like pencils, pens and paper that your kid already has a ton of at home.

Once you know what your kid has, create your list together with your child. This can be a great learning experience for them. They can help you choose the items that they need, while still working within the budget you’ve set for them, teaching them a valuable money lesson.

Shop Around

For basics like pens and papers, there’s nothing wrong with heading to your local retailer, but if you’re going to be buying anything expensive or anything in large quantities, it’s worth spending the time to shop around. By shopping around, you can see if there are better details to be had out there.

And don’t just limit yourself to brick and mortar stores. See if there are better deals to be had online. You may be surprised about the deals available out there.

Share with Other Parents

Buying in bulk can save you money, but what if it’s way too much of something like pencils and you’re afraid your child isn’t going to be able to use them all even when they graduate from university? You might consider going in “halfsies” and split the cost with another parent. By doing that you can still get a great deal on an item and not end up with way too much of it. It’s a win-win situation for everyone involved!

Start Shopping Early

Don’t make the mistake of waiting until the day before school is back in session to go shopping. Not only could the supplies you need to be sold out, you’re probably not getting the best deals on them either. By planning ahead of time, at the end of July or early August and starting your back to school shopping early, you’ll save money (even if your kids don’t like hearing about back to school so early on in the summer).

Are you looking for other ways to save on back to school? Contact our offices today for more great savings tips.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

NSF Fees and How to Avoid Them

You’re running around doing errands and you stop to log onto your bank account. You discover that in the midst of your busy day, you’ve somehow overdrawn your account. Now you’re being charged an NSF fee, and you’re so confused.

What’s this fee dragging down your balance even more? And how can you get rid of it?

What is an NSF Fee?

A non-sufficient funds fee is a fee your bank charges when you overdraw the account and you have a negative balance. Banks charge this fee because they have to cover the difference while your account is in the red.

You may also be charged if you wrote a check to someone else and they tried to cash it, but there weren’t enough funds in the account. The bank will charge an NSF cheque fee. The fees depend on your bank, but are often around $45.

These fees are designed to discourage people from overdrafting their accounts and not having enough money.

How to Avoid NSF Fees

The easiest way to avoid NSF fees is to always have enough money in your bank account. If you keep a buffer in your checking account, you never have to worry about overdrawing your account.

If you keep incurring NSF fees because you keep too much money in your savings and not enough in your checking, move a small amount from your savings to your checking account. It’s not worth trying to earn a higher interest rate in your savings account if you end up paying a $45 NSF fee every few months.

You can also find a bank that notifies you when your balance is low. Some banks do this by text or email. When you get this notification, you can transfer more money from your savings account to your checking. Some fintech apps also send reminders when you have a low balance.

If you still use checks, make sure to note how much money you have when you write the check. It’s easy to forget about checks you’ve written because there’s no way to be reminded of them. If possible, try to switch to online payment. Most checks expire only after six months, so you could wind up having an account overdrawn because someone deposited your check five months after you wrote it.

Some people experience NSF fees because they set their bills to be automatically paid the same day. If possible, stagger your dates so they don’t all fall on the same day. You can base them on different pay cycles.

If you accidentally spent more than you earned one month, you may have to keep a balance on your credit card to avoid overdrawing your bank account. You’ll pay interest on the credit card, but that’s preferable to owing an NSF fee.

It’s better to make minimum payments on your debt than try to pay the max and overdraft your account. Make the minimum payment automatic and then pay extra manually, once you know how much you can afford to pay.

About the Author

Zina Kumok is a trained journalist and has covered everything from professional sports to murder trials. Now, she specializes in personal finance and has written for brands and publications such as Mint, Investopedia and Discover. She paid off $28,000 worth of student loans in three years.

Identity Theft: What It Is and How to Prevent It

Identity theft is a growing problem in Canada. Every year thousands of Canadians fall victim to it. While the Internet and computers have made our lives easier in a lot of ways, it’s also made it easier for fraudsters to steal your personal and financial information. The good news is there are ways you can protect yourself. Let’s take a look at what identity theft is and how you can prevent it.

What is Identity Theft?

Identity theft is the deliberate use of another person’s identity, usually for financial gain. Identity theft comes in all different shapes and sizes. It can be something as simple as stealing someone’s mail or more sophisticated like hacking into your computer. Even companies aren’t safe from data breaches. There have been countless stories of personal data breaches over the years.

The aftermath of identity theft can leave you in financial ruins. Not only could fraudsters ruin your credit, but you could also suffer thousands of dollars in losses. This can hurt your ability to get credit later on when you need it if you want to get a mortgage or car loan.

How to Prevent Identity Theft

You don’t just have to sit idly by hoping you aren’t the victim of identity theft. There are things you can do to be proactive and prevent it. You should be extra careful about handing over personal and financial information, especially your address, date of birth, social insurance number (SIN) and credit card information. If someone were to obtain those online they could assume your identity.

Without further ado here are our best tips on how to prevent identity theft.

Safeguard Personal Information

Be extra cautious when sharing your personal information. Examples of sharing personal information include buying goods online and filling in an application for employment. Before willing handing over your personal data, you should ask why it’s needed and how it will be used.

Be even more careful with your SIN. If your SIN ends up in the hands of fraudsters, your credit could be damaged. Unless your SIN is absolutely required, it’s best to leave it off a form.

Protect Your Wallet or Purse

Hold onto your wallet and purse and keep eyes on them at all times. A criminal will have hit the jackpot if they obtain them. When you bring your wallet or purse with you, it’s a good idea to leave as much of your personal data at home. For example, don’t make the common mistake of bringing your SIN card everywhere with you. Only bring it when you truly need it.

Be Cautious with Your Credit Card

You should be cautious when sharing your credit card information with anyone. Although the majority of credit cards have zero liability protection where you aren’t at fault if your credit card is fraudulently used, it’s still a good idea to be proactive and takes steps to prevent it from happening in the first place.

Although it’s convenient, don’t save your credit card information directly on websites. If the website is ever hacked, your credit card information could be stolen.

Also, only share your credit card information with companies that you trust. Don’t ever give it to an incoming caller unless you’re 100 percent certain who it is.

Looking to rebuild your credit after being the victim of identity theft? Contact our offices today to come up with a game plan.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Why You Should Stress Test Your Own Finances

Interest rates have been low for the better part of a decade, but just because they’re low now, it doesn’t mean they’ll stay low forever. Although it doesn’t look like the Bank of Canada is going to be raising interest rates this year, who’s to say our central bank won’t raise interest rates next year or the following year? The Bank of Canada has raised interest rates five times since mid-2017 and it could very well do it again in the future. How do you prepare your family for possible interest rates hikes? You can do that by stress testing your family’s finances.

Let’s take a closer look at stress testing and why it’s important.

The Mortgage Stress Test

When you hear the term “stress test,” probably the first thing that comes to mind is the mortgage stress test.

The mortgage stress test was introduced on January 1, 2018, to protect homeowners from rising interest rates. Anyone buying a home putting down at least 20 percent must pass the mortgage stress test. The mortgage stress test makes you qualify at a mortgage rate higher than the actual mortgage rate you’re signing up for.

The stress test requires you to qualify at the greater of your mortgage rate plus two percent and the Bank of Canada’s five-year benchmark rate (currently at 5.34 percent). For example, if you’re applying for a mortgage with a rate of 3.39 percent, you need to qualify at 5.39 percent, since 3.39 percent plus 2 percent is higher than 5.34 percent.

The mortgage stress test was mainly brought in to cool the overheated real estate markets in Toronto and Vancouver, as well as protect homeowners from higher mortgage rates when their mortgages come up for renewal. What if mortgage payments were 2 percent higher when your mortgage came up for renewal, could you handle it? That’s the all-important question the mortgage stress test answers.

Applying the Stress Test to Your Other Debts

Although the stress test is a term most often associated with mortgages, it’s a good idea to also apply it to other debt that you’re carrying, especially any debt with a variable interest rate. For any debt with a variable interest rate, you’ll feel the effects right away of an interest rate hike. If interest rates on your line of credit or personal line tied to prime rate were to rise 2 percent, could you handle the new payment? That’s the question you should be asking yourself.

Although you won’t feel the effects right away of an interest rate hike to any of your debt with a fixed interest rate, it’s still important to stress test it, as you could face a higher payment when your term ends and you need to renew.

Taking Stress Testing a Step Further

If you want to take stress testing a step further to ensure you’re prepared if and when higher interest rates arrive, you can pay your debt as if interest rates are already 2 percent higher. By doing that you won’t feel as much of a shock when interest rates eventually rise, not to mention you’ll save lots on interest by paying more than you need to at present interest rate levels.

Need some help with stress testing your own finances? Contact our offices today. Our credit consultants are happy to help.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Lines of Credit versus Personal Loans: Which Should I Choose?

You want to borrow money, but you’re not sure the best way to do it. You know a credit card doesn’t make sense since it will be a large expense that you plan to pay off over an extended period of time. You’re thinking a line of credit or personal loan makes sense, but you don’t know which one is best.

Let’s take a closer look at lines of credit and personal loans and when you might want to choose one over the other.

What’s a Line of Credit and When Might It Make Sense?

Lines of credit are loans that allow you to borrow up to a predetermined limit. A line of credit is quite flexible. You’re able to borrow as much money as you need and pay it back on your own schedule (when you’re approved for an interest-only repayment schedule).

A line of credit is revolving credit. This is just a fancy way of saying that you’re able to borrow against it whenever you want and pay it off on whenever you like without applying for a new loan. Lines of credit don’t have a specific date you’re required to pay them back in full. Instead, you can pay them off on a schedule that works with your finances. (However, the longer you take to pay off your line of credit, the more you’ll pay by way of interest.)

With a line of credit, you can make interest-only payments, making your payments more affordable. Also, you’ll only pay interest on money that you’ve borrowed. (You’re charged interest only on the money you withdraw from your line of credit, not on the credit limit itself.)

Lines of credit can make the most sense for both short- and long-term borrowing needs. For example, if you’re looking to consolidate debt and you may need to borrow more money down the line, a line of credit makes a lot of sense. You’ll be able to borrow more money later on without applying for a new loan.

Likewise, if you’re planning to borrow money for a major expense, such as a costly home renovation, or you’re planning to borrow money on an ongoing basis (i.e. for a serious of home renovations), then those are other instances when lines of credit can make sense.

What’s a Personal Loan and When Might It Make Sense?

A personal loan is a loan in a fixed amount that you agree to pay back over a specific time period by way of instalments. Loans usually need to be paid back over six to 60 months.

Loans are less flexible than lines of credit. If you need to borrow additional funds or you’d like to extend the repayment period, you may need to apply for a new loan.

The monthly payments on loans tend to be higher. Unlike lines of credit where you can make interest-only payments, the payments on loans must consist of interest and principal. Also, unlike a line of credit, you’re charged interest on the total loan amount the moment you take out a loan, regardless of when you use the money.

Loans make the most sense for specific needs, like paying for a vehicle or a one-time home renovation. If you don’t plan to borrow any more money, a loan can make a lot of sense.

A loan is also handy for those who lack financial discipline and prefer a fixed payment schedule. With a line of credit, it can be tempting to make interest-only payments, but by doing that, you’re no further ahead. With a loan, you’re required to make interest and principal payments. Because of that, your minimum monthly payment is higher, helping you pay off the loan sooner and save on interest.

Are you still not sure whether a line of credit or personal loan makes the most sense for you? Contact our offices today. Our credit consultants are happy to help.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Canadian Household Debt on the Rise: What Does it All Mean?

It’s hard to pick up a newspaper these days and not see at least one headline about the elevated debt levels in Canada. If you find yourself in consumer debt, at least you’re not alone. But is all the worry really justified? Is Canadian household debt bordering on excessive or is the fear overblown?

Let’s take a closer look at Canada’s household debt situation and what it all means.

The Debt to Income Ratio Hits a New Record

If we focus on just the facts, the facts don’t lie – Canadian household debt is on the rise. Together we owe $2.16 trillion in debt. As a share of GDP, Canada has the dubious honour of having the highest debt load of the G-7 countries.

How did we as Canadians find ourselves in this situation? Low interest rates for the better part of a decade have encouraged Canadians to go on a borrowing binge.

A popular way to measure household debt is the debt to income ratio. The media loves to use this in attention grabbing news headlines. The debt to income ratio looks at your total debt compared to your income. To calculate your own personal figure, add up all your debts – your mortgage, car loan, line of credit, credit card debt and any other debt you might have – and divide it by your net (after tax) annual income. Multiply that figure by 100 and voila, you have your own debt to income ratio!

As of the fourth quarter of 2018, the average Canadian’s debt to income ratio rose to a record 174%, up from 148% a decade ago.

But there’s no guarantee interest rates will stay low forever. The Bank of Canada has already increased interest rates five times since mid-2017. Although it looks like our central bank has taken a pause with respect to further rate increases, if rates were to continue to rise again in the future, many Canadian families who are already feeling the squeeze from higher interest rates, might feel even more of a squeeze if and when higher interest rates arrive.

Is It All Really So Bad?

At first glance Canada’s debt situation looks pretty dire. While the total debt figure and the debt to income ratio may look scary, those are only two measures of household debt. Another important measure is your ability to service your monthly debt.

To calculate this figure, add up how much debt you have each month. This is debt you’d have to pay even if you were on holidays laying on a beach, sipping an umbrella drink. This includes your mortgage, car payments, minimum credit card payments and minimum student loan payments. Then calculate how much your household brings in on a monthly basis. This includes your salary, your spouse’s salary and any extra income you earn on the side.

Take the debt figure and divide it by your income figure and multiply by 100. Ideally, you want to keep this figure below 40 percent, although if you’re living in a city like Toronto or Vancouver where the cost of living is higher, that number could creep as high as 50 percent (although lower is better). Anything over 50 percent and it should raise the alarm bells. In that case, you should look to cut back on your fixed expenses.

The Bottom Line

When I was paying off my house, my debt to income ratio was almost 450 percent and I was fine. That being said, if your debt to income ratio is high and so is your monthly debt figure, then that should be an area of concern.

Confused about these numbers? Contact us today. We’re happy to walk you through them and help you get on the right financial path.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.