Til Debt Do Us Part

by Darryl Baker

Agenda for thematic unit

• Lesson 1 – Basics of debt and credit• Lesson 2 – Economic factors that influence

future indebtedness• Lesson 3 – Amount of credit card and student

loan debt (not covered in this powerpoint)• Lesson 4 – Perspectives on American and

Canadian debt (not covered)• Lesson 5 – US debt run amok and effects on

world order (not covered)• Etc.

Nothing is certain in life except death, taxes, AND debt

T1 GENERAL Income Tax and Benefit Return

Complete all the sections that apply to you in order to benefit from amounts to which you are entitled.

Identification Attach your personal label here. Correct any wrong information.

If you are not attaching a label, print your name and address below.

First name and initial

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Year

Enter your date of birth:

Month Day

8

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(see the "Marital status" section in the guide for details) PO Box RR 1 Married 2 Living common-law 3 Widowed City

Prov./Terr. Postal code

4 Divorced 5 Separated 6 Single

Information about your residence

Enter your province or territory of residence on December 31, 2006: Enter the province or territory where you currently reside if it is not the same as that shown above for your mailing address:

If you were self-employed in 2006, enter the province or territory of self-employment:

If you became or ceased to be a resident of Canada in 2006, give the date of:

Information about your spouse or common-law partner (if you checked box 1 or 2 above) Enter his or her SIN if it is not on the label, or if you are not attaching a label:

Enter his or her first name:

Enter his or her net income for 2006 to claim certain credits: (see the guide for details)

Enter the amount of Universal Child Care Benefit included in his or

her net income above (see the guide for details):

Check this box if he or she was self-employed in 2006: 1

Person deceased in 2006 entry

Month Day or

departure

Month Day If this return is for a deceased person, enter the date of death:

Do not use this area

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Elections Canada

THIS SECTION APPLIES ONLY TO CANADIAN CITIZENS. DO NOT ANSWER THIS QUESTION IF YOU ARE NOT A CANADIAN CITIZEN.

As a Canadian citizen, I authorize the Canada Revenue Agency to provide my name, address, and date of birth to Elections Canada for the National Register of Electors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes Your authorization is required each year. This information will be used only for purposes permitted under the Canada Elections Act.

Goods and services tax/harmonized sales tax (GST/HST) credit application See the guide for details.

1 No

2

What is debt? Debt is created whenever one of the two parties

to any transaction puts off turning over his/her end of the transaction -the money or the things or the work he/she is promising-but gets immediately the valuable consideration being offered from the other party.

Debt is a means of using future purchasing power (the amount of goods/services a $ can buy) in the present before the money has actually been earned

Why do we go into debt?• People take on debt in order to acquire the things they

need/want that they would never be able to obtain if they had to pay for them with cash (e.g. house, car)

• Companies use debt to buy assets (e.g. another company) in the hopes that the investment will return more than the interest payments on the debt. This is called leveraging and the company that accumulates the debt is said to be leveraged.

• Governments issue/sell bonds (a form of debt) to their citizens to have the funds available today to pay for capital investments (roads, bridges, sewers), to pay down existing higher-cost loans, and other uses for which they need money today

When is debt good?Debt is good when it is used for the essentials. Debt is good when it is limited and controlled. A way to do this is set a percentage of your income

as debt related. In other words, if you feel that 30% of your income can be devoted to repayments of loans, then stick to that level of debt and do not exceed it.

Debt is good when you make it a habit to pay off loans, on time and in full.

The repayment of even small loans will be good on your credit history and those on-time, in-full repayments also free up additional cash as you don’t have to set aside any money for monthly interest payments.

Debt and Your Credit History If you have ever taken out a loan, used a credit card or taken advantage of a

"buy now, pay later" offer, you will have a credit history. Whenever a financial institution, such as a bank, a credit card company, or

any other business gives you credit, it may send information about whether or not you make your payments on time to a credit-reporting agency, aka credit bureau. The credit bureau collects information about you and how long it takes you to pay back money you have borrowed. This information is called your "credit history". When you want to borrow money in the future, the lender will check with a credit bureau to see if you have a good credit history.

Having a good credit history is very important. If your credit history is poor, a lender can refuse to give you a loan. You may not be able to get a mortgage to buy a new house, or take out a personal loan. If the lender does decide to give you the loan, a poor credit history may mean you will have to pay a higher interest rate. A poor credit history can affect you in other ways, too. For example, a landlord may refuse to rent you an apartment because of a poor credit history. It may even affect whether you get hired for some jobs.

You’ve got history

• Your credit history is recorded in files maintained by at least one of Canada's three major credit-reporting agencies: Equifax, TransUnion, Northern Credit Bureaus.

• These agencies provide information about credit history in two ways, as a credit report and as a credit score.

• A credit report is a "snapshot" of your credit history. It is one of the main tools lenders use to decide whether or not to give you credit.

• You have the right to see your credit report. No one else can have access to the information in your report unless you allow it. Usually, when you sign documents such as a loan or a credit card application, you are allowing the organization that is giving you credit to check your credit history. Credit-reporting agencies will only give information from your credit report to someone else when you have given permission, and when the request is related to credit, collection of a debt, rental of a house or an apartment, or an application for employment or insurance.

• You may request a free copy of your credit report any number of times in a year.

The Ratings Are In Included in your credit report is a rating of each of your debt items on a

scale from 0 to 9 (e.g. R0 refers to a new account; R1 refers to on-time payments; R9 refers to bad debt).

A credit rating assesses the credit worthiness of an individual, corporation, or even a country.

Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan.

However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit, e.g. on a cell phone account.

A poor credit rating (R9) indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.

CANADA TRUST MC last reported to us in 01/01 rating your revolving account as R1, meaning paid as agreed and up to date. At the time the reported balance of your account was $285. Your account number: xxx...234. Date account opened: 06/99. Credit limit or highest amount of credit advanced $2000. DATE OF LAST ACTIVITY meaning the last payment or transaction made on this account was in 12/00.PREVIOUS PAYMENT STATUS:30 DAYS: 1 time (s) account previously R2 meaning one payment past due

Your Credit Score

• A credit score (also called a FICO score) is not part of a regular credit report. Basically, it's a mathematical formula that translates the data in a credit report into a three-digit number that lenders use to make credit decisions.

• There are many different ways to work out credit scores. The credit-reporting agencies Equifax and TransUnion use a scale from 300 to 900. High scores on this scale are good. The higher your score, the lower the risk for the lender.

• Lenders may also have their own ways of arriving at credit scores. In addition, lenders must decide on the lowest score you can have and still borrow money from them. They can also use your score to set the interest rate you will pay, e.g. if you're between 701 and 750, you'll likely pay one-quarter to half a percentage point more than someone with a score above 750. Over the term of a mortgage, that translates into a difference of thousands of dollars in interest.

Making the Credit Grade

A Credit Score of 760 means:• It is very unlikely your

applications for credit cards or other loans will be turned down, based on your score alone.

• Most lenders will consider offering you very attractive and competitive rates and terms on loan products.

• Many lenders will be able to provide you with an instant approval status based on your score.

Doing Yourself Credit Pay your bills on time.

Try to pay your bills in full by the due date. If you aren't able to do this, pay at least the required minimum amount shown on your monthly credit card statement.

Contact your creditors if you are having trouble making payments.

Make sure that your monthly account statement is correct.

Read the statements and other material you receive from your credit card company carefully. Keep up to date on any fee increases or changes in your card's terms and conditions.

Deal with companies you know and trust.

Get a copy of your credit report from all three credit-reporting agencies at least once a year and make sure they are accurate.

Not Doing Yourself Credit

Don't accept or use any form of credit until you understand and are comfortable with its terms and conditions, to avoid any misunderstandings between you and the credit issuer.

Don't wait to report any unauthorized transactions on your account. Contact your credit issuer immediately if your bill includes items you did not buy.

Don't go over the credit limit on your credit card.

The Current State of Canadian Family Finances2006 Report Highlights

• SOCIAL IMPACTS OF FINANCIAL STRESS – Insolvency is only one indicator of stress. Credit card debt is now being used as a “safety net’ and to make “ends meet’. Many people with easy credit access coupled with historically low interest rates now believe that there is no real need to set funds aside for a rainy day. They use new credit to pay off old debts. Debt stress is now part of the medical lingo. Financial problems also affect the work place, as workers spend a lot of work time dealing with their

problems. • I REALLY DID GIVE AT THE OFFICE – Real hourly earnings of employees paid by the

hour are still slipping. Salaried people are doing just a bit better. Combining both types of workers, real earnings are up by about 25 cents since 1991. Continued employment

growth and a few special payouts supported household incomes in 2005 and 2006. • SECOND EARNERS COMING THROUGH IN RECORD WAY- In 2004, the second

earner among married couples with children brought in $19,500, the largest ever contribution. Couples with children and only one income earner are far more likely to live in poverty … five times more likely.

More 2006 Report Highlights

• MOSTLY NEED AND NOT GREED – A special look at spending concludes that for many households, much of the strain on finances has been due to increases in the costs of many basic necessities that far outstripped relatively flat incomes. For these households, the tendency to save less and borrow more may have been due more to need rather than to greed.

•NOT GETTING THERE – Women working at paid jobs on a full-time, full-year basis still earn 70% of what men do … basically unchanged for over a decade. Women, especially older women, are suffering through a growing share of consumer insolvencies. Female lone-parents have made positive strides, but there is still a long way to go in reducing poverty among these families.

•GROWING INEQUALITY – The richest 20% are getting a growing share of both the income pie and the wealth pie. The rest are either getting a smaller piece or just holding on. The poorest 20% have, on average, only $400 stashed away for a rainy day. There are now 1.1 million millionaire households in Canada.

• KA-CHING! DEBT KEEPS CLIMBING – Debt loads now stand at 127% of incomes … another new record. Thanks to rising real estate and stock market advances, debt is supported by growing assets. As such, the financial institutions seem to be covered. Many individuals and families are not and insolvencies remain high. The risk of insolvency is soaring for the 65+ crowd.

The much more rapid advance in spending came at the expense of savings and the accumulation of more debt. Annual savings dipped from roughly $7,300 per household in 1990 to about $1,000 in 2006.

The 2004 income tax load falls to lowest level in

two decades

Not getting there! … Women still earn 70% of

what men do at full-time, full year jobs

Likelihood of being in debt and poor• The poverty rate among two earner couple families with children

held near 3.7% in 2004. The rate for one-earner families with children was a much higher 18.4% … or almost five times more.

• The poverty rate among unattached individuals has not changed much over the last 15 years, with about 30% living in poverty in 2004 compared to 31% in 1990.

• About 36% of female lone-parents families lived in poverty in 2004, down sharply from about 49% in 1990.

• Not only are these lone-female parents more likely to be working, but the average income of those in the paid workforce increased by 17% from $26,500 in 1990 to $31,100 in 2004. As such, the poverty rate for families with one earner dropped from 39% in

1990 to 30% in 2004. Still very high.

Growing Inequality in Incomes

TABLE 1Average incomes after transfers and income taxes

for families of 2 or more in constant 2004$

Average incomein 2004$

Change 1990to 2004

1990 2004 In dollars % change

All families of 2 or more $54,500 $62,700 +$8,200 +15.0%

Poorest 20% of families $20,400 $22,300 +$1,900 +9.3%

Lower-middle 20% of families $36,600 $39,100 +$2,500 +6.8%

Middle 20% of families $49,700 $54,200 +$4,500 +9.1%

Upper-middle 20% of families $64,900 $72,700 +$7,800 +12.0%

Richest 20% of families $101,000 $125,000 +$24,000 +23.7%

Source: People Patterns Consulting based on Statistics Canada

The rich are accumulating wealth, the rest are accumulating debt

About 1.1 millionaire households BUT over

2 million with less than $5,000 • The average wealth of the richest 20% of households climbed

to $1,261,200 in 2005, a jump of $297,900 from 1999. This group also had the biggest (+30.9) percentage increase over

the period. • At the other end, for the 20% of households with the least to

call their own, wealth was non-existent and, on average, they were $2,400 in the red (owed more debts than owned assets) in

2005, worse by another $900 compared to 1999. • According to the 2005 Survey of Financial Security, only 10% of

households in the bottom 20% of the wealth distribution had received inheritances at some time, compared with 36% among the richest 20% of households. On average, the market value of inheritances for recipients in the poorest group was only one-

tenth ($13,200) that of the richest group ($136,600).

How far will $400 go? Poorest households at greatest risk

• The poorest 20% of households (about 2.7 million of them) held, on average, about $400 in deposits in a financial institution in 2005 ... they had little else to fall back on. This group was also hampered by having to support $1.19 of debt for every $1.00 of total assets. This is up from $1.16 in 1999 and is the largest increase in the debt-to-assets ratio among any of the five income groups.

• The richest 20% of households had about $16,000 on deposit plus another $47,000 in stocks that could be sold quickly. The richest group had another advantage … it was supporting only five cents of debt for every $1.00 of total assets. The five cent debt load was unchanged from 1999.

• If the job market was to weaken, it would be more of the poorest who would slip over the edge.

Ka-ching! Ka-ching! Can you hear it ring! –

Debt ratio hits 127%

In 2006, Cdn household debt reached a record of $1 trillion

Debt per household has now surpassed $75,000 and keeps on Debt per household has now surpassed $75,000 and keeps on risingrising

Factors underlying the debt bulge

The most recent data, measured in constant 2004 dollars, tells us that our collective debt load is up by 42% since 1990 and this compares to an increase of “only” 4.8% in real earnings.

Solid employment gains, relatively low interest rates, rising real estate values and a strong stock market have sustained the ability to borrow additional funds from the lending institutions. As such, debt levels as a percent of total assets have remained near the 17% level for several years.

Insolvencies reported by seniors have risen 11 times - the group that will exhibit the fastest growth in population

and households over the next two decades

ON AVERAGE … we are getting richer

BUT …do you feel rich

• In 1984, Canadians owed about $187 billion in personal debt. In 2004 we owe more than $801 billion.

• Personal bankruptcies are near record highs. In 2003, for the first time ever, the average Canadian household owed more than its annual take-home pay.

• We carry 74 million credit cards – three for every Canadian over the age of 18. Credit counselling agencies say they're busier than ever. Students are often graduating with accumulated debt of $25,000 or more. Consumer debt levels are rising much faster than incomes and have been for years. Savings rates are at record lows.

Debt in Canada 1984 2004

Interest paid onconsumer credit

$6 billion $22 billion

Interest paid onmortgage credit

$14 billion $34 billion

Source: Statistics Canada

WebsitesDebt Nation: Cdn credit stats and facts

US National Debt Clock