Your FICO Score is Changing in 2008

In order to reduce the potential risk of lending money to an individual, lenders evaluate the creditworthiness of the borrower by looking at various variables which influence the likelyhood of a person's ability to pay back his or her debt is a timely manner. These variables and statistics are then run through a mathematical model to arrive at a number (score) that is called a credit score. This numerical credit score represents the creditworthiness of an individual and is utilized by by all kinds of institutions like Banks, credit card companies, phone companies, insurance companies etc. The Banks and lending institutions are of particular importance as credit scores are used by them to determine who gets to borrow, how much and at what rate of interest.

A credit score named 'FICO' is a commonly heard credit score that is used by banks and other lending institutions for mortgage lending. FICO is a trademark of Fair Isaac & Co. as this credit scoring system was developed by them. In the United States and Canada FICO scores are available through the three major consumer reporting agencies (also called credit bureaus) namely, Equifax, Experian and TransUnion. [US Tel Nos: Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) Canada Tel Nos: Equifax (1-800-465-7166), Transunion (1-800-663-9980)]

While there are other factors the key factors that can adversely effect your score are:

• Not having sufficient credit history of credit
• Late payments of bills
• Placed for collections with a collection agency for an upaid bill
• Having a large number of inquiries on your credit report
• Having high credit-card balances that are nearing your credit limit

What goes in to your FICO score (With their relative weights):

• Payment History 35%
• Types of Credit Used 30%
• Amounts Owed 15%
• Length of Credit History 10%
• New Credit 10%

It was just announced by Fair Isaac & Co. that in 2008 your FICO scores are changing. FICO announced that it will be tweaking its current model of calculating your credit scores using some new mathematics and statistical models. The good news is that your current FICO score is anticipated to move up a bit when the new math models are applied and your score recalculated for 2008.

The new provisions that are coming into force in 2008 now:

a) Stops authorized users from using your Card
b) There are higher penalties for not paying your bills on-time
c) There are more rewards on your score for paying bills on-time
d) There are additional points for carrying different types of debt

This above translates in to the following:

a) If you are someone who does not have your own credit card and have been authorized by some one else (like a parent or spouse) to use their card then it is time for you to apply for your own. Lenders want to know you directly and want you to establish your own credit history. Also in the past authorizing someone else to use your card has encouraged unnecessary scams and fraud that creditors (or lenders)wish to curb.

b) It is imperative that you pay your bills on time as deliquency will now cause increased damages to your FICO-score and timely payment will reap richer rewards to your score.

c) Having different kinds of debts like a mortgage, credit card debt, a student loan etc, now will now positively impact your FICO-score.

Although carrying too many credit cards under the new calculations does not impact your credit score that much it is nevertheless still recommended that you do not carry more than two or three credit cards. Carry the ones that are have cash rewards or cash value. Specially during the holiday season stores lure you with significant discounts on your initial purchase. They carry a significantly higher APRs and the history of these cards most of the time sits unnecessarily for perpetuity on your credit history. So look beyond just the initial purchase from these cards. If the initial offfer is too hard to resist then you may want to avail of the offer and subsequently have the card cancelled. So Pick cards judicially and the ones that you will use.

If you are in the market for a mortgage then here is an example that should drive home the point of having a good FICO-credit score that ends up in saving thousands of dollars in interest payments.

Based on a $200,000 mortgage, spread over 20 years the above table reflects how much you would be paying each month with different FICO-Scores. The difference between the best and the worst is $125,000 in interest payments over this period!

A FICO Score is your personal financial health barometer indicative of your credit risk- Score Well!

Puru Grover / MD / Credit Guru Inc.

Applying for Credit?

*Discrimination *What Laws Apply? *What
Creditors Look For *Information the Creditor Can't Use
*Special Rules *Discrimination Against
Women *If You're Turned Down

Discrimination

When you're ready to apply for credit, you should know what factors creditors think are important in deciding whether you're creditworthy. You should also know what factors they cannot legally consider in their decisions.

What Law Applies?

The Equal Credit Opportunity Act requires that all credit applicants be considered on the basis of their actual qualifications for credit and not be rejected because of certain personal characteristics.

What Creditors Look For

The Three Cs. Creditors look for an ability to repay debt and a willingness to do so--and sometimes for a little extra security to protect their loans. They speak of the three Cs of credit: capacity, character, and collateral.

Capacity

Can you repay the debt? Creditors ask for employment information: your occupation, how long you've worked, and how much you earn. They also want to know your expenses: how many dependents you have, whether you pay alimony or child support, and the amount of your other obligations.

Character

Will you repay the debt? Creditors will look at your credit history (see section on Credit Histories and Records): how much you owe, how often you borrow, whether you pay bills on time, and whether you live within your means. They also look for signs of stability: how long you've lived at your present address, whether you own or rent your home, and the length of your present employment.

Collateral

Is the creditor fully protected if you fail to repay? Creditors want to know what you may have that could be used to back up or secure your loan and other resources you have for repaying debt other than income, such as savings, investments, or property.

Creditors use different combinations of these facts to reach their decisions. Some set unusually high standards; others simply do not make certain kinds of loans. Creditors also use different rating systems. Some rely strictly on their own instinct and experience. Others use a "credit-scoring" or statistical system to predict whether you're a good credit risk. They assign a certain number of points to each of the various characteristics that have proved to be reliable signs that a borrower will repay. Then they rate you on this scale.

Different creditors may reach different conclusions based on the same set of facts. One may find you an acceptable risk, whereas another may deny you a loan.

Information the Creditor Can't Use

The Equal Credit Opportunity Act does not guarantee that you will get credit.
You must still pass the creditor's tests of creditworthiness. But the creditor must apply these tests fairly and impartially. The act bars discrimination based on age, gender, marital status, race, color, religion, and national origin. The act also bars discrimination because you receive public income, such as veterans benefits, welfare or social security, or because you exercise your rights under federal credit laws, such as filing a billing error notice with a creditor. This protection means that a creditor may not use any of these grounds as a reason to

• discourage you from applying for a loan
• refuse you a loan if you qualify
• lend you money on terms different from those granted another person with similar income, expenses, credit history, and collateral
• close an existing account because of age, gender, marital status, race,
  color, religion, national origin, receipt of public income or because you exercise your rights under federal credit laws.

Although creditors may not discriminate on the basis of national origin, they may consider your immigration status when making a loan decision.

Special Rules

Age

In the past, many older persons have complained about being denied credit because they were over a certain age. Or when they retired, they often found their credit suddenly cut off or reduced. So the law is very specific about how a person's age may be used in credit decisions.

A creditor may ask your age, but if you're old enough to sign a binding contract
(usually 18 or 21 years old depending on state law), a creditor may not:

• turn you down, offer you less credit, or offer you less favorable credit terms because of your age
• ignore your retirement income in evaluating your application
• close your credit account or require you to reapply for it because you reach a certain age or retire
• deny you credit or close your account because credit life insurance or other credit-related insurance is not available to a person your age.

Creditors may "score" your age in a credit-scoring system, but if you are 62 or older you must be given at least as many points for age as any person under 62.

Because individuals' financial situations can change at different ages, the law lets creditors consider certain information related to age, such as how long until you retire or how long your income will continue. An older applicant might not qualify for a large loan with a very low down payment and a long term, but might qualify for a smaller loan, with a larger down payment, and a shorter term. Remember that although declining income may be a handicap if you are older, you can usually offer a solid credit history to your advantage. The creditor has to consider all the facts and apply the usual standards of creditworthiness to your particular situation.

Public Assistance

You may not be denied credit just because you receive social security or public assistance, such as Temporary Assistance to Needy Families (TANF). But as is the case with age, certain information on this source of income could clearly affect creditworthiness. A creditor may consider such things as how old your dependents are (because you may lose benefits when they reach a certain age) or whether you will continue to meet the eligibility requirements for receiving benefits.

This information helps the creditor determine the likelihood that your public-assistance
income will continue.

Housing Loans

The Equal Credit Opportunity Act covers your application for a mortgage or home-improvement loan. The act bars discrimination because of characteristics such as your race,
color, gender or because of the race or national origin of the people in the neighborhood where you live or want to buy your home. Creditors may not use any appraisal of the value of the property that considers the race of the people in the neighborhood.

Also, you are entitled to receive a copy of an appraisal report that you paid for in connection with an application for credit, provided you make a written request for the report.

Discrimination against Gender or Marital Status

Both men and women are protected from discrimination based on gender or marital status. But many of the law's provisions were designed to stop particular abuses that generally made it difficult for women to get credit. For example, denying credit or offering less favorable credit terms based on the misperception that single women ignore their debts when they marry, or that a woman's income "doesn't count" because she'll stop work to have and raise children, is unlawful in credit transactions.

The general rule is that you may not be denied credit because you are a woman or because you are married, single, widowed, divorced, or separated. Here are some important protections:

Gender and Marital Status

Usually, creditors may not ask your gender on an application form (one exception is on a loan to buy or build a home). You do not have to use Miss, Mrs., or Ms. with your name on a credit application. But in some cases, a creditor may ask whether you are married, unmarried, or separated (unmarried includes single, divorced, and widowed).

Childbearing Plans

Creditors may not ask about your birth-control practices or your plans to have children, and they may not assume anything about those plans.

Income and Alimony

The creditor must count all of your income, even income from part-time employment. Child support and alimony payments are a source of income for many women. You don't have to disclose these kinds of income, but if you do, creditors must count them.

Telephones

Creditors may not consider whether you have a telephone listing in your name because this factor would discriminate against many married women. (However, you may be asked if there's a telephone in your home.)

A creditor may consider whether income is steady and reliable, so be prepared to show that you can count on uninterrupted income, particularly if the source is alimony payments or part-time wages.

Your Own Accounts

Many married women once were turned down for credit in their own name. Or a husband had to cosign an account--that is, agree to pay if the wife didn't--even when a wife made sufficient income to easily repay the loan. Single women couldn't get loans because they were thought to be somehow less reliable than other applicants.
You now have the right to your own credit, based on your own credit records and earnings. Your own credit means a separate account or loan in your own name, not a joint account with your husband or a duplicate card on his account. Here are the rules:

• Creditors may not refuse to open an account because of your gender or marital status.
• You can choose to use your first name and maiden name (Mary Smith), your first name and husband's last name (Mary Jones), or a combined last name (Mary
  Smith-Jones).
• If you're creditworthy, a creditor may not ask your husband to cosign your account, with certain exceptions when property rights are involved.
• Creditors may not ask for information about your husband or ex-husband when you apply for your own credit based on your own income unless that income is alimony, child support, or separate maintenance payments from your spouse or former spouse.

This last rule, of course, does not apply if your husband is going to use your account or be responsible for paying your debts on the account or if you live in a community property state. (Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.)

Change in Marital Status

Married women have sometimes faced severe hardships when cut off from credit after their husbands died. Single women have had accounts closed when they married, and married women have had accounts closed after a divorce. The law says that creditors may not make you reapply for credit because you marry or become widowed or divorced. Nor may they close your account or change the terms of your account on these grounds. There must be some sign that your creditworthiness has changed.
For example, creditors may ask you to reapply if you relied on your ex-husband's income to get credit in the first place.

Setting up your own account protects you by establishing your own history of how you handle debt. You can rely on this record if your financial situation changes if you become widowed or divorced. If you're getting married and plan to take your husband's surname, write to your creditors and tell them you want to keep a separate account.

If You're Turned Down

Remember, your gender or race may not be used to discourage you from applying for a loan. And creditors may not hold up or otherwise delay your application
on those grounds. Under the Equal Credit Opportunity Act, you must be notified within 30 days after your application has been completed whether your loan has been approved or not. If credit is denied, this notice must be in writing, and it must explain the specific reasons that you were denied credit or tell you of your right to ask for an explanation. You have the same rights if an account you have had is closed.

If you are denied credit, be sure to find out why. Remember, you may have to ask the creditors for this explanation. It may be that the creditor thinks you have requested more money than you can repay on your income. It may be that you have not been employed or lived long enough in the community. You can discuss terms with the creditor and ways to improve your creditworthiness. The next section explains how to improve your ability to get credit.

If you think you have been discriminated against, cite the law to the creditor.
If the creditor still says no without a satisfactory explanation, you may contact a federal enforcement agency for assistance (the federal agency you should contact should be included in the notice you receive from the creditor), or you may bring legal action, or submit your complaint to
Federal Reserve Consumer Help
PO Box 1200Minneapolis, MN 55480
888-851-1920 (Phone)877-766-8533 (TTY)877-888-2520 (Fax)Email:ConsumerHelp@FederalReserve.gov
http://www.federalreserveconsumerhelp.gov/

This article is an excerpt from the 'Consumer Handbook to Credit Protection Laws' published by the US Federal Reserve Board.

Consumer Proposals: Declare Bankruptcy or is there an alternative for individuals in Canada?

Bankruptcy is a drastic measure and should always be filed only as a last resort in overcoming financial difficulty. Bankruptcy on its surface appears as an attractive and immediate remedy for overcoming debt crisis but its negative effects on your ‘credit-image’ lasts for years to come. Generally, information concerning your bankruptcy could blemish your credit report for a period of 6 to7 years after your discharge. If you have been bankrupt before, this period could be extended to as much as 14 years. This period could vary from province to province. Then to add fuel to fire, the impact could permeate in to restricting applying for certain types of jobs, licenses and loans.

In Canada is there an alternative to Bankruptcy?

In Canada the Bankruptcy and Insolvency Act (BIA) allows you may make a ‘Consumer Proposal’ to your creditors to reduce the amount of your debts, extend the time you have to pay off the debt, or provide a mix of both.

As a precursor to filing a proposal we recommend the following:

• You should have already ascertained that you can not pay your debts i.e. you are ‘insolvent’


• You approached your bank or financial institution which refused your request of combining or "consolidating" your debts into one loan.


• Do the math. If not the full amount, how much of your debt can you pay per month? (Consider your Income and Expenses)


• Create a rough payment plan to repay the debts


• Establish primary contact with each creditor (the person/institution) that you owe money to and communicate your informal plan by delineating why you are having financial difficulty in making your payments and suggest making lower payments over a longer period of time. You may be surprised that there are creditors who will be willing to accept such arrangements.

If the above does not work then in Canada a formal consumer proposal can be triggered under the BIA. The best part of filing a consumer proposal under BIA is that in Canada there is no claim of bankruptcy and your credit report stays clean.

Lets us first review as to who qualifies to file a consumer proposal under the BIA.
Any person who is insolvent and whose debts are less than $75 000 can make a consumer proposal. The $75,000 amount excludes a home mortgage. (If the debts are more than $75 000, the proposal can still be made but differs and is made under Division I of Part III of the BIA.)

When you wish to make a proposal, it must first be approved by the inspectors and you must have obtained the assistance of a trustee who will be the administrator of the consumer proposal.

The procedure begins with the help of an administrator who might be a trustee in bankruptcy or a person appointed by the Superintendent of Bankruptcy. (You can find a trustee by looking up your local yellow pages.) He or she will ask you about your financial situation assess it and give you advice about what kind of a proposal may be best for you and your creditors. The administrator will ask you to sign the required forms which will then be filed with the Official Receiver.

The advantage of undertaking this process is that upon filing the required forms with the official receiver your unsecured creditors will not be able to take legal steps such as seizing property or garnisheeing wages to recover their debts from you as long as your proposal is not rejected, withdrawn or annulled. Also, if you default on your proposal the administrator of the proposal gets discharged and creditors and resume their remedies against you. (If you wish to file a proposal you must first obtain the assistance of a trustee who will be the administrator of the consumer proposal.)

From the date of filing the proposal with the official receiver the administrator within10 days is required to send the Official Receiver a report that contains the administrator's opinion about fairness of your proposal and whether you will be able to execute the terms of the proposal. The report also lists your liabilities, assets and all your creditors whom you owe at least $250. The administrator is also required to send all your creditors a copy of your proposal and a copy of the report on the proposal and calls for a meeting of creditors if required under section 6615 of BIA. The creditors are instructed to either accept or reject your proposal within 45 days by replying to the administrator. No response means acceptance. If no creditors respond or your creditors vote yes, your proposal is approved pending Court approval. However, if more than 25% of your creditors vote no a meeting must be held in which your creditors vote whether or not to accept your proposal.

Your creditors will have up to 45 days to consider whether to accept or reject your proposal. A creditor may send a note to the administrator accepting or rejecting the proposal. If creditors do not respond, they will be considered to have accepted the proposal. If a sufficient number of creditors accept the proposal it then becomes binding on you and your creditors. You then must meet all its terms

If the proposal gets rejected by your creditors you will no longer be protected under the BIA. Within 5 days of the rejection of your proposal the administrator will the Official Receiver and all your creditors about the rejection after which the creditors will be able to take legal steps to recover their debts from you.

Once you have fully performed on your proposal, the administrator issues a certificate of full performance to you and the Official Receiver and you will be relieved of the debts that were listed in the proposal.

Highlights

• If a proposal gets accepted there are no more worries about collection calls from collection agencies or direct calls from your creditors.


• If there are any legal enforcements against you, like garnishment of wages etc, these are automatically stopped.


• A consumer proposal gives certainty and its actions leads to get your life back in order


• In Canada there is no claim of bankruptcy and your credit report stays clean.


• Note: Consumer proposals do not affect the rights of secured creditors. If a creditor has a valid security against your property (i.e., car or house), and if you can afford monthly payments, financial arrangements may be made with the secured creditor to keep the property and continue paying for it.


• If you want more information on making a consumer proposal to your creditors, contact an administrator of consumer proposals. (Look up your Yellow Pages under the heading of Bankruptcy)
  To read the BIA on Consumer Proposals visit the following link: ( BIA – Consumer Proposal Div II)
  
  DISCLAIMER:
  
  The information on this blog Credit Mantra is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, insolvency or other professional advice and services. As such, it should not be used as a substitute for consultation with professional insolvency, legal or other competent advisers. While we have made every attempt to ensure that the information contained on the Credit Mantra Blog has been obtained from reliable sources and the blogger is not responsible for any errors or omissions, or for the results obtained from the use of this information.

Writing a Credit Policy for your Business

Is your Credit Policy Profitable ?

Author: Puru Grover

Credit is an indispensable catalyst in financing the movement of commerce. Its roots go fairly deep in time and are definitely as old as the concept of trade itself. As early as 1300 BC the Babylonians were lending on the basis of getting a charge on security or collateral. Credit touches us in various ways. To some it could be a mere caress or a tickle, to others it could be a brush, to some a graze and for others a crash or a collision.

To demonstrate the importance of credit, according to Industry Canada sources the Small Business Loans Act (SBLA), a program that serves start-up and smaller firms, has succeeded in lending more than $ 20 Billion to over 50,000 Small and Medium sized Enterprises (SMEs) in Canada, since its inception in 1961. The loans have helped in creating approximately four new jobs per loan. Today SMEs have become an integral part of the Canadian economy. Firms with fewer than 50 employees each were responsible for 81% of the new jobs in Canada in 1996-1997.

Credit helps in production, distribution, selling, consumption and expansion. It helps smoothen the rough curve of seasonality of a seasonal business. It increases the immediate buying power of a consumer. But where there is good there may also be bad and ugly. Credit could mean a collapse due to Overbuying, Overexpansion or Overselling. Probably the single most important factor is the maintenance of proper cash flow in operating a successful franchise. Cash flow problems can be avoided by making sure that you administer and manage credit with financial prudence and get paid promptly for goods or services rendered. Accounts Receivables, which can be broadly defined as uncollected sales, are one of the largest assets of a business, amounting to approximately 15% to 20% of the total assets of a typical manufacturing business. An uncontrolled growth in sales could result in an uncontrolled management of account receivables. What is the mission of a person with credit responsibility? What is the function of credit and credit management? To answer these questions I will refer to an article written by Michell Woods-Howell, wherein is mentioned the mission statement of Microsoft's Credit department. - 'To maximize the protection of Accounts receivable while supporting Microsoft's effort to expand sales and increase market share throughout the world, to evaluate accounts receivable worldwide risk and to make sure we have appropriate reserves in place.'

It just goes to corroborate the fact that no matter how big or small is the size of business operation, companies are focussing increasingly on managing and collecting their receivables efficiently and effectively, thus maximizing their cash inflows.

Credit is temporary capital and the objective of credit is to lend with the purpose of increasing profits and sales. A sound credit policy in business is the blue print to managing by measurement and benchmarks. The question then arises is 'What is a Credit Policy and how does one write a Credit Policy for their specific nature of business operations?
Writing an effective Credit Policy begins with an understanding of the financial exposure that you or your business can endure and the amount of your working capital that you would be willing to risk, or call it 'invest' in your customers.

Revolutionary developments in the computer and communications fields have forced companies to increase speed and become relevant. Markets are becoming global and economic activity across nations is becoming increasingly integrated. Competition can come from the face of a computer screen with the competitor sitting in a different time zone. About the only thing in business that is a constant, is change. As the world transforms at an unprecedented pace so have to the components that propel its engines. Thus a credit policy that is written without an understanding of the market and ample room for change in it and the one that is not frequently revisited could become obsolete in matter of days. With the information-age revolution, knowledge-based activities are becoming increasingly important for existence. Hence, enhancing skill-sets and knowledge is an intangible component of a credit policy.

I am of the firm belief that 'what gets measured gets managed'. Therefore as a matter of policy one should manage by measuring results. Every time a deal goes bad, review the things that were done incorrectly in either setting up of the account, monitoring or collecting it. Measure Days Sales Outstanding (DSO), aging receivables, and bad debts as a percentage of sales. Keep a tab on your liquidity by reviewing liquidity ratios like the current or working capital ratio. Also keep a pulse on your inventory turnover. This will tell you if your efficiency is increasing, decreasing or the same over different time periods. Profits are a combined function of liquidity and efficiency. You can use the same logic when assessing your customer.

Using quality information can help scores in managing risk. Collecting relevant information requires a well thought-out Credit Application. It should seek permission from your customers to conduct credit investigation from credit bureaus, trade and bank references for the purpose of granting credit. A Credit Application is a document that not only collects information but is also an 'Application for a Loan ' that the applicant fills. Make sure that your Credit Application reflects the sentiments that you are serious about the amount that you will be extending in the form of cash or kind.

As a guideline you can write your policy in the following sections. The contents of each section can be written to best fit the nature of your franchise:

1. The set-up of credit function.
2. Objectives of the credit function
3. Terms and conditions of sale
4. Sales responsibilities with credit issues
5. Billing procedures
6. Obtaining Information on new customers
7. Procedures for opening new accounts
8. Process of assessing the information to arrive at line of credit and credit terms that will be offered
9. Monitoring your investment in your customers
10. Profiling your customers to do strengths, weakness, opportunity and threat analysis.
11. The feedback loop for reporting
12. Allocating resources and responsibilities
13. Defining past-due and bad debts
14. Targets, benchmarks and deadlines for the credit function
15. Procedure of collecting from delinquent customers
16. Analyzing the changing needs of your markets/customers.
    

Entering the marketplace by investing in a franchise can be one of the best ways that an entrepreneur can launch a successful business. Franchising in Canada continues to grow at a significant rate. Franchise sales in Canada in 1987 were estimated at $61 billion; and now it is close to 90 billion. The retail trade alone represents almost two-thirds of that number. It is expected that sales will increase 10 to 15 percent annually over the next few years. The person who operates a franchise gets the better of both the worlds - the satisfaction of operating an independent business, combined with the leverage of working for a large organization.

Ultimately, Credit Management is an art and not a science. It is definitely an 'indefinite'. It gets its design from a variety of inputs like the creativity, experience philosophies and attitudes of the individuals administering it. Sometimes a decision based on your 'gut' feeling against all odds could prove to be the best one. But as a credit adage goes "get the calculations right in a calculated risk" and remember that 'A sale is not complete till the money is collected.' Good luck with your franchise.

Source: The above article appeared in the "Canadian Business Franchise Directory 2000". The directory is a complete guide to franchising in Canada and is available at major book sellers.

Consumer Bankruptcy in Canada - YTD October 2007

In the month of October 2007 the number of individuals filing for bankruptcy reported by Industry Canada was 7,304. This is about 5% higher than the 6,947 bankruptcies that were filed by individuals in the month of October in 2006.
The total number of individuls that have filed for bankruptcy so far from January 2007 up until October 2007 is 67,524. This is about a percentage point higher than what the number was a year ago.

In the past 10 years in Canada, Consumer Bankruptcies form January to October have been averaging at 67,505
The number of Consumer Bankruptcies from January 2007 to October 2007 is more or less on track alongside the decade long trend. However if you compare the Jan 2007 to Oct 2007 number of 67,524 consumer bankruptcies to Jan 1990 to October 1990 number of consumer bankruptcies of 33,938 it is whopping increase of nearly a 100%! It would be also interesting to note that the maximum number of consumer bankruptcies occured in 1997 when the Jan 1997 to October 1997 number peaked at 73,381.

The current Canadian National Consumer Bankruptcies Average stands at 2 bankruptcies for every 1,000 individuals.The hightest per capita consumer bankruptcies have been recorded in Newfoundland (3.6 bankruptcies for every 1,000 individuals)The other two Atlantic provinces of Nova Scotia and New Brunswick are second and third respectively.Quebec is fourth in the line up with 2.8 bankruptcies for every 1,000 individualsOntario is right on the national average of 2 bankruptcies for every 1,000 individuals.The rest of the provinces are below the Canadian National Consumer Bankruptcies Average.

In essence, the eastern provinces are experiencing a growth in insolvencies whereas the western provinces are recording a decline. It could be speculated that the western economy is driven by the petroleum demand and the east is buckling under the pressures of a stong canadian dollar and a weakening manufacturing sector.

Canada is a large and diverse country. With its resources dispersed regionally we witness varied levels of economic trends unfold in the east and west.Currently the west is booming. Oil prices are rising giving Alberta an economic edge. Oil and oil-by-products account for almost 70% of its exports. There is a shortage of labour in Alberta as oil companies are struggling to drive production. In 2006, Alberta had the lowest unemployment rate of all the provinces at 3.4%. At that time Newfoundland was sitting at an unemplyment rate of 16%! Insolvency thus has a directly proportionate relationship to the joblessness rate of a province. Alberta has one of the least per capita consumer bankruptcy filings (1.2 bankruptcies for every 1000 individuals)As the west is experiencing prosperity and Bentley has opened a showroom in Calgary the rest of the country is in an economic downturn. Canada’s manufacturing sectors in Ontario and Québec are experiencing layoffs and closures. The exports are affected due to the strong Canadian dollar. All of this embroiled by a the housing boom, which on hand is helping create jobs but on the other fuelling increased credit extensions and spending. This helps mitigate the crisis in manufacturing sector and the recent cut in interest rates by Bank of Canada will again boost this sector to perhaps a record level of housing sales in 2007.

It will be interesting to see how all this pans out when the final insolvency figures for 2007 are released by Industry Canada in February 2008.

Adapted from an article written by PURU GROVER \/ MD Credit Guru Inc.

Insolvency numbers sourced from OSB Industry Canada

Collecting Your Debts

With perrmission from CreditGuru.com © 1999-2007 Credit Guru.com
Collection Skills Series

Here are eight points to consider when collecting from your overdue customer.

1. Be Prepared:

Know thyself……!
There couldn’t be a better way of wasting a phone call if you were not physically and mentally prepared to make that phone call. Emotions can be very easily read over the phone. So be eager to collect the money. After all it is your money!
In your call be prepared to Express Urgency! Remember if you are not eager to get paid, why will your overdue customer be eager to pay you. State your urgency regarding the overdue debt by soaking it with emotions. Also, be prepared for some retaliation. After all it is the nature of the beast! Hence, be positive and make the person on the other side of the phone see the merits and the positive sides to paying their debt on time and also explain the consequences of non or late-payment. Psyche yourself for the call and at all times maintain a professional approach.
…know thy customer’!
Understand the impact of this customer to your business. Both in terms of size and cash flow. Study the history and payment trends of this particular customer. Know the exact amount and reason for the overdue amount. Remember, when you make the call, ask for the full amount and do not assume that there is a problem. Many collectors make the mistake of asking ‘Is there is a problem’!
Know the decision-maker and speak to him or her. The size of the company will determine who your payment decision-maker will be. The smaller the company the higher the level of decision-maker. Involve a decision-maker, because you expect a quick decision and a commitment that in future your invoices will be paid on time.
If their Payment Pattern has changed take immediate corrective measures. Investigate the reason because it could be the beginning of some concerning cash flow problems. Show concern as a business partner but assert the fact that the payment is overdue and that you expect to get paid on time, each time.

2. Ask Questions.

Questions convey to your customer that you are concerned. Questions also provide you important information for leading the discussion and controlling it. Questions also yield information or reference material for future reference. Ask open ended questions and when the conversation requires it ask leading questions. If time is being wasted then perhaps start closing with close-ended questions. Keep control!

3. Listen

If you are asking questions the tendency is to get distracted with asking and thus forgetting to listen! Don’t just listen to what your customer has to say but listen to the surroundings, the tone of your customer, the sincerity etc. Active listening requires being more imaginative than mere casual listening. Paraphrase and summarize your conversation. Clarify and state clearly your expectations from the customer. It shows that you care and listen and that you have clarity of thought.

4. Make Notes:

Memories are mighty short! There is no substitute here, talk with a pen and paper in your hand doodle, if you have to, and keep writing. Your notes could even save the day one day when you need them. Hence, preserve them electronically or otherwise where it becomes part of customer history. Let others in the company, especially sales, have access to your notes.
In your follow-up calls get progressively firm if the need arises. Be assertive and not aggressive.

5. Broken Promise(s):

There is an adage in collections: ‘If they break three promises they will break thirty’. Broken promises are to be taken seriously. Promises are made on both sides yours and the customer’s. If you made a promise like ‘Calling at a particular time’ or ‘ Investigating a certain problem within a certain time frame’, then keep your promise! There is nothing worse than loosing credibility. Say what you can do and not what the customer needs to hear. Credibility is one of the most important aspects of a collection call. Make sure that the company will support your actions before you talk about them to your overdue debtor (customer).
If a customer breaks his or her promise then take immediate action otherwise again your credibility will be at stake and don’t be afraid to point fingers at the customer for demonstrating poor credibility.

6. Avoid Arguments and Threats.

A debtor can easily push you into an argument and drive your attention away from the your key objective of ‘getting-paid immediately’. Stay composed and focussed. In the profession of collecting debts it is easy to get aggravated, emotional and flustered. Getting into an argument is tempting . Do not allow your customers to lead you, be firm composed and guide yourself. Use your leverage as a last resort.

7. Objections.

The objective of your call is to get the full amount paid NOW! You could be faced with a barrage of objections in achieving this objective. Treat every objection as an ‘Opportunity’ to get a commitment for full payment. Establish with your customer that the objection that they are posing is the only one and if that objection is dealt with then there should be immediate payment. Get the commitment on getting paid on an objection.

8. Work smart and not hard.

Use the resources available to you effectively. If you really want to be successful in collecting those debts then get the salesperson involved too. Make friends with your salesperson.
The quality of your collection effort counts and not the quantity. If you subscribe to a collection agency then use them effectively. Some of them provide you with collection stickers. Use these on your correspondence or overdue statements. It adds extra leverage to your collection efforts.
Finally, remember that you are dealing with a business partner. Customer Service is a part and parcel of a collector’s job. Enjoy what you do and the monies from your overdue accounts will just follow.

Credit Guru Inc provides Collection Skills and Negotiation Techniques Training globally. Read more about one of their signature programs.

Credit Repair – Beware!

Given the current liquidity crunch in the US credit market linked to the mortgage market, more individuals will be faced with the need of obtaining credit counseling. It is an appropriate approach to take when an individual’s credit is in default or on the verge of default. But at the same time it is also a vulnerable moment for a distressed individual seeking help who may naturally get attracted to the current barrage of radio, television and print ads that promise a turnaround in credit problems by ‘repairing’ or ‘fixing’ the consumer’s bad credit file.

A credit-file or credit-history is maintained by a credit bureau. Credit bureaus also known as credit reporting agencies are private companies that collect payment information on individuals predominantly from employers, landlords and lenders (banks and credit card companies, including the ones issued by large retail chains or departmental stores). They also collect any public information on an individual to report any bankruptcy and/or judgments awarded in courts, on his/her credit file. The credit history or credit file that we have been referring to in this article in common parlance is called a ‘consumer credit report’.
These credit reporting agencies in the US are governed by the Fair Credit Reporting Act (FCRA) and in Canada by Consumer Reporting Act. Depending upon the nature of information they can legally report accurate credit information anywhere between seven to ten years. Factual information can not be erased from the individual’s credit report for a specified time period, unless proven to be inaccurate.

Credit repair services can charge a fee only if they are able to accomplish a ‘material improvement’ in their client’s credit report. The fee for fixing/repairing a credit-file by these so-called ‘credit-repair’ companies could range anywhere from $50 to $1,500.
An example of a material improvement would be correction of incorrect information contained in a credit report through their efforts. It is therefore logical to say that a credit repairer can not claim to make a material improvement to a consumer’s credit file without reviewing and researching the consumer’s credit report. Thus prepayment of credit repair services is illegal in certain jurisdictions.
If you hire the services of a Credit repairer, the repairer must provide you with a written and dated contract. Some jurisdictions provide a cooling-off period (about 10 days), which typically begins from the time you receive a copy of the contract. If the credit repairer fails to refund the money you can file the claim in small claims court. (Link: Credit Repair Organizations in the US are governed by Title IV of the Consumer Credit Protection Act)

If you have concerns about information contained on your credit report the same will be investigated free of charge by the credit bureau reporting it. It is therefore not required or necessary to hire a third party to obtain and/or investigate the items that you deem questionable in your credit report. Information contained in your credit report can not be deleted by these companies that claim that they can perform ‘credit-repair’ and ‘fix’ your credit report. The only information that can be purged or altered is the one that is found to be inaccurate. You can personally contact the credit reporting agency with details of the disputed (erroneous, misleading, or outdated) entry on your credit report. Each consumer credit report has a provision for an individual to add a short ‘consumer statement’. Typically a consumer statement is up to 100 words that a credit reporting agency allows from an individual to comment on information that is disputed in the consumer’s credit report.

There in no quick-fix for bad credit. Remember credit is a privilege and creditworthiness can only be improved with the passage of time and by judicious use of credit granted to you since accurate and historical credit information generally cannot be removed from your credit report. Over time with responsible and remedial creditworthy etiquette going forward you may be able restore your creditworthiness and reinstate an optimal credit limits with potential creditors. ( To learn more about how to fix your credit report follow this link to a fairly detailed article by CreditGuru.com )

So consider yourself warned about credit repair scams!

Basics of a Consumer Credit Report

Information contained in a consumer credit report
How long does negative information gets retained on a consumer credit report
Understand your credit ratings
Other important Considerations

SAMPLE-Equifax Credit Report (.pdf file format)

What information does a consumer credit report contain?

Here is a general overview of the different sections in a consumer credit report:

1. Personal Identification
Contains key identification information, such as your name, address, birth date and Social Insurance Number (SIN), Social Security Number (SSN).

2. Inquiries
Lists all individuals or organizations that have requested a copy of your credit file in the past three years.

3. Public Record
InformationContains information about secured loans, bankruptcies and/or judgments.

4. Third-Party Collection Agency
Contains information about any involvement with a collection agency trying to settle a debt.

5. Trade Information
Provides details of your credit transactions and shows whether payments are being made. Each of these "trade" items is evaluated by the credit grantor.The evaluations are based on industry standard ratings, the most common of which use a range from R0 to R9. R0 indicates you are too new to rate; R1 indicates that you pay within 30 days of billing or as agreed; R9 indicates a bad debt, collection or bankruptcy.

6. Consumer Statement
This is where you can add a brief comment about any information in your file. For example, if you have an R9 rating, you may want to explain that you suffered a setback due to illness, temporary unemployment or other extenuating circumstances.

How long does a credit bureau keep information in my credit file?

The following is from the public domain of Equifax:

CREDIT INQUIRIES TO THE FILE: An Inquiry made by a Creditor will automatically purge three (3) years from the date of the inquiry. The system will keep a minimum of five (5) inquiries.

CREDIT HISTORY AND BANKING INFORMATION: A credit transaction will automatically purge from the system six (6) years from the date of last activity. All banking information (checking or saving account) will automatically purge from the system six (6) years from the date of registration.

VOLUNTARY DEPOSIT - ORDERLY PAYMENT OF DEBTS, CREDIT COUNSELING: When voluntary deposit - OPD - credit counseling is paid, it will automatically purge from the system three (3) years from the date paid.

REGISTERED CONSUMER PROPOSAL: When a registered consumer proposal is paid, it will automatically purge three (3) years from the date paid.

BANKRUPTCY: A bankruptcy automatically purges six (6) years from the date of discharge in the case of a single bankruptcy. If the consumer declares several bankruptcies, the system will keep each bankruptcy for fourteen (14) years from the date of each discharge. All accounts included in a bankruptcy remain on file indicating "included in bankruptcy" and will purge six (6) years from the date of last activity.

JUDGMENTS, SEIZURE OF MOVABLE/IMMOVABLE, GARNISHMENT OF WAGES: The above will automatically purge from the system six (6) years from the date filed.

COLLECTION ACCOUNTS: A collection account under public records will automatically purge from the system six (6) years from the date of last activity.

SECURED LOANS: A secured loan will automatically purge from the system six (6) years from the date filed.
(Exception: P.E.I. Public Records: seven (7) to ten (10) years.)


Ratings and what do they mean

R0
Too new to rate; approved but not used

R1
Pays (or paid) within 30 days of payment due date or not over one payment past due

R2
Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due

R3
Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due

R4
Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due

R5
Account is at least 120 days overdue, but is not yet rated "9"

R7
Making regular payments through a special arrangement to settle your debts

R8
Repossession (voluntary or involuntary return of merchandise)

R9
Bad debt; placed for collection; moved without giving a new address

Other rating indicators that might be found on a report are "I" for installment credit or "O" for open credit line.

Other Considerations

Watch out for a loan that you have co-signed. Depending on the policy of the lending institution, Co-Signed loans get repoted on both files of the borrower and the co-signer.
A default in payment could get repoted on the credit file of a co-signer.

The 4Cs of Credit

What are the 4 Cs of Credit?(Copyright, 2002-2007, Credit Guru.com.)

What are the 4 C's of credit? What do they mean? Are there 3, 4, 5 or 6 Cs of Credit?

Credit investigation could get intricate and dense. The information that is being gathered could be getting strewn and scattered all over the place. The 4 Cs of Credit helps in making the evaluation of credit risk systematic. They provide a framework within which the information could be gathered, segregated and analyzed. It binds the information collected into 4 broad categories namely Character; Capacity; Capital and Conditions. These Cs have been extended to 5 by adding 'Collateral', or extended to 6 by adding 'Competition' to it (Reference: Credit Management and Debt Recovery by Bobby Rozario, Puru Grover). How about 'Computer' being one of the Cs in this day and age?...or mere 'Common Sense'!

No matter how many Cs we come up with, the fundamental question that remains to be answered by the framework of our analysis is:'Will I get paid on time?'

So let's discuss the structure of our credit analysis within the context of the 4 Cs of Credit.

Character

JP Morgan, a successful businessman once said that 'I will do business with anyone as long as he/she is honest!'

In analyzing Consumer Credit one would consider the following:

• Has the person declared bankruptcy in the past
• Does the person have a good credit record
• Does he/she have a stable job What is the level of education/experience
• What is the person earning and what is the earning potential
• Stability at the place of residence, whether rented or owned.

In analyzing Commercial Credit one would consider the following:

• The size of the operations The number of years in business
• The legal form of the business By this one means 'Retail', 'Wholesale', 'Service' or 'Manufacturing'. Typically the incidence of business failures is high in the Retail and Service segments. Is the business a Parent, Subsidiary or a divisiono Does the business have a Holding company?" The structure of the businesso Is the business a Sole Proprietor, Partnership or Corporation?For Sole proprietor or Partnership type one would further seek personal information on individual(s) running the business.
• The number of employees. There are Industry specific Norms for 'Employees to Sales' ratio.
• The management record of the company
• The location of the company
• Any previous evidence of fraud
• Any previous Insolvency record?
• Any Labor disputes or issues?
• Are the products/service sold by the prospect complimenting products/service to the ones that you may sell?
• Is the business practice ethical?
• Is the business seasonal/ non-seasonal
• Is the business Local/ National or International. The economy of a business accordingly could depend upon local/ national or international economy.
• Is there a growing or a going market for this business or the business redefining itself and what would be the impact of the internet on this business. See what computer downloads (E.g. Napster in the recent past) has done to the music industry
• How willing is the prospect to share information?
• How diligently does the prospect fill your Credit Agreement/Application?
• What are the references saying?
• Are there too many lay-offs especially of key personnel?
• Are there any Law suits pending against the company?
• What does the website of the company say and look like?
• Is there any recent media coverage about the company? Is it positive or negative. Or are there any rumors floating?
• If the company's stock is publicly traded then see how its stock is performing? One can also check the indices for a particular type of Industry to see how in general the Industry is doing. The collapse of the NASDAQ last year was a warning of the debacle of the tech companies.

Capacity

What does one analyze under this segment? Is it:

• Capacity of the business to pay?
• Capacity of the business in getting paid?
• Capacity of the business to receive/absorb?
• Capacity of the credit grantor to expose?
  

Sometime a business that you are analyzing might not have the required Capacity in kind but the same could be latent and hidden in some other form. For example a start-up business should have a good business blue-print of succeeding namely a good business plan. A contractor might have a good media advertising plan, say an Ad in the local Yellow Pages. All this adds to the capacity of a business to carry on trade and perhaps be successful.

Innovation, Education, Experience, Knowledge would be some other considerations. Management should be able to foresee trends in the marketplace and blend accordingly. It should have plans both for good and bad turns in the economy. Adoption of sound management techniques and computer-related technologies is important. Companies must remain Relevant with their processes; products and operate with Speed in today's Digital age. Larger businesses should also have people that know how not just to manage the company but also its main asset, its people.

Cash and Only Cash can pay bills. The capacity of a business to pay its bills would stem from good cash-flow. A business could become cash strapped if it does not collect its accounts receivable on time. You must have heard of DSO! What is DSO? Isn't it a measure of ones capacity to pay? Say if a business has a DSO of 55 days. This means that at an average this business gets paid by its customers in 55 days. The question then arises that when will this business then pay its suppliers? In all probability the answer is that its capacity to pay its suppliers will be after 55 days. In this event you may want to evaluate its borrowing capacity to see if you can cajole this company to pay you in time even if it means that this business borrows to pay you.

This would bring on the analysis of how the debt of the company is structured in terms of secured and unsecured debt with an operating lender, generally the bank. Short term borrowing could be calculated as a percentage of the inventory and A/R on hand. One should look at the line of credit and see if there is capacity for more borrowing. Also check for any negative occurrences as bad checks (cheques) or any default against operating loans or covenants.
The capacity of your product to influence payment is also important. If your product being sold is fiercely competitive then it may not have the capacity to influence timely payment. If your product does not directly contribute to the COGS (Cost of goods sold) of the buyer then again it might not have the capacity of influencing timely payment. Competition definitely influences Capacity.

The Capacity to expose and increase your credit risk also depends upon your own ability and resilience to getting hit with either slow payment or perhaps no payment! Credit departments that have a lot of confidence in their collection ability and ability to influence payment have a wider capacity to expose and absorb.

Your product-margin will also influence this capacity.

Capital

Capital would refer to the financial resources obtained from financial records that a company may have in order to deal with its debt. Many a time's credit analysts would make this portion of the credit analysis the most important one. Weight is given on Balance Sheet items and components like Working Capital , Net Worth and Cash Flow.

One must know how to read financial statements and that too from the perspective of a creditor. Short term liquidity is important if you are expecting to get paid in the short term. You should be able to see whether this company has the ability to absorb more debt and then where does your loan (selling on credit is a loan - isn't it?) fit in the overall debt-framework of this business. You should also evaluate to see if you can depend on the numbers whether they are audited, unaudited or company prepared. If required speak with the firm or person who has prepared the statements.Leveraged borrowing depends on the equity/ net worth that a company has and it is a good idea to see if the company is committed to improve its borrowing-power by contributing to its Equity/Capital/Net Worth . One way of doing this is by retaining all or portions of its earnings.But all said, done and then undone Cash and ONLY Cash pays bills. Thus, keep an eye of the company's cash-flow and cash-position.
But one must be cognizant of the fact that financial records are snapshots of the past and credit analysis is trying to figure out the future. Thus all 4 Cs of credit are important in the overall analysis of a company or an individual where you combine elements of the past to make a futuristic prediction.

Conditions

This refers to the external conditions surrounding the business that you are analyzing.
For example the construction industry might get influenced with the changes in the government's wide range of policies on immigration, interest rates and taxation.
There might be likelihood that a company that you are evaluating deals in international trade and a shift in the currency rates might have a detrimental or beneficial effect on it.The events on Sept 11th have had added a new meaning to Force Majuere in context of International Trade terms and conditions. Air Travel has been impacted.Ford recently announced closing 5 plants in North America asides from thousands of layoffs one will have to be vigilant on the impact that it will bear on the suppliers to the Ford Motor Company.

Business with local economies would be prone to the social climate and their influence on the local society. Torontonians must have heard of the flamboyant discount retailer "Honest" Ed Mirvish who treats the local community to free turkeys every Christmas. On another note a lot of businesses became insolvent in the Ice Storm a few years ago in eastern parts of the US and Canada that were totally dependant on the local economy. A mild winter has a detrimental effect on businesses that depend on snow. Importers and exporters are affected by currency fluctuations.
Again, one might look at how the internet is redefining business. Recently I was at a very small camera shop and soon realized that the business was generating big revenues on the internet and especially eBay.
All of this can again influence the ability or intention of a customer to pay his/her bills.

Thus in evaluating the degree of risk of a customer, information revolving around the 4Cs of credit would be normally necessary.