Here's my letter to Jeannine with some solutions that could save her thousands of dollars and most importantly, save her and her husband over ten years on paying their credit cards. They're a young couple and if they make these changes now, it will significantly change their financial future.
My letter to Jeannine:
Preliminary Numbers/Calculations for Jeannine
April 17, 2009
The mortgage
If you have a good relationship with your lender, now might be the time to look at refinancing your mortgage only with respect to your rate. However, I’m not familiar with Wells Fargo and any hidden charges they might have. Since rates have dropped substantially, you can’t actually break your mortgage without fees if the term hasn’t expired (i.e. if you locked in to a 5 year term at 5.75% and let’s say you’re in year 2, if you broke that mortgage and went to another lender, you’d have to pay a huge fee). However, what most banks will do is give you a blended rate (an in-between the posted current rate and your existing rate without fees). Again though, I don’t know if/what Wells would charge and their policy…but it’s worth a try.
Here’s my assumption – with current 5 year terms at 4.5% (some even lower if you negotiate the rate down) and your current rate of 5.75%, you theoretically could get a blended rate of say 5.00%. Here’s my numbers on that assumption:
Current mortgage payment - $1,928.50 *
Total interest paid in the 40 year life - $560,456.66 **
New blended rate payment - $1,747.63
Total interest paid in the 40 year life - $473,868.28 **
Monthly savings of: $180.87
Yearly savings of: $2,170.44
Total mortgage life savings: $86,588.38 **
*You’re likely paying by-weekly, but I’m using monthly for ease of this example.
**This is assuming everything stayed the same for 40 years which of course it wouldn’t…but just for the sake of this example.
The Credit Cards
Assuming a minimum payment of 3% per month of the outstanding balance of all the credit cards/lines of credit combined would equal $1,296 per month in minimum payments.
If you only made this minimum payment, it would take 13 years and 5 months to pay the entire $43,191 in current outstanding balances. This would cost you $10,926.21 in interest payments.
If we could change your mortgage to the new blended rate and take that $181 per month in savings and allocate it to paying down the credit card debt, making your total monthly payments $1,477, it would only take you 2 years and 8 months to pay off all the credit card balances with interest charges only equaling $3,253.16 (a savings of $7,673.05 by paying just the minimum.)
Saving for Retirement
I just did a quick calculation … if you now took that just about $1,500 per month that is being used to pay off credit card debt and allocated it to RRSP savings, assuming a 6% rate of return and a 3% inflation rate for 35 years (till retirement), you’d have $3,002,881.
Disclaimer: Kelley Keehn is not a registered investment advisor and the information provided in this document should be considered educational in nature, but it is not a substitute for legal or professional financial advice. If you believe you need the help of a Certified Financial Planner or other investment counselor, please seek a qualified professional.
Thursday, May 21, 2009
Wednesday, May 20, 2009
Answering your credit questions - #4 - Suze Orman said to pay yourself before you pay your credit card payment - is this a wise thing to do?
Question #4:
I heard Suze Orman (American Financial Guru) say on her show that viewers in financial trouble should pay themselves first before they even pay their credit card payments, even if it means their score will dramatically decline. Is this a wise thing to do?
Answer:
First, Suze is an American Financial Guru. One must realize that the Canadian and American banking and financial system is almost night and day in most respects. They've been hit much harder in the US with their banking system and since they have very little regulation down there, many financial institutions operate like the wild west.
According to a statistic I heard on CNBC's On The Money, a few months ago, over 62% of American credit card holders had their credit card limits reduced (forced upon them) or closed entirely by the issuer. Thus, I can see where Suze would make such a recommendation. If someone was facing financial difficulties and paid their credit card diligently but had no savings for themselves, and then the issuer, out of the blue, cancelled their credit card (demanding full payment), it might be prudent to have some emergency cash savings. After all, survival at that point would be more important than worrying about a credit score that could later be fixed.
However, in Canada, we're not facing the same dilemma as our neighbours to the south. Sure, credit's a bit tighter here as it is globally, but we're on solid footing. Actually, the IMF (International Monetary Fund) has ranked Canada as the strongest banking system in the world. I've also spoken to the Canadian Banker's Association and the banks and credit card companies and they tell me it's business as usual - that they haven't suspended or closed credit card accounts due to the recession.
But a point of interest that one must be aware of, is that even if the credit card companies in Canada are not following what the US counterparts are doing, they are legally allowed to, should they choose to do so. A credit card works like a demand loan - the operative word being "demand" and demanded by your bank or the issuer. If you read the fine print when you signed up for your card, the company technically can demand payment in full at any time.
So having a solid slush fund of 3 -6 months savings is always a prudent suggestion. However, in our country, I would not recommend missing any credit card payments to throw it into a savings account as our system is pretty solid. Furthermore, one missed credit card payment can haunt your credit report for years and pulls your score down dramatically. Plus, if you're paying double digit interest rates on your card, it wouldn't make sense to throw it into a savings account paying a dismal rate of return.
If you'd like to read Suze's fully story on the issue, visit this link http://www.suzeorman.com/igsbase/igstemplate.cfm?SRC=SP&SRCN=suzescoop&GnavID=1&SnavID=134&NewsID=183
Be cautious when listening to media reports about the economy, banking and finance as the US system is dramatically different from ours.
I heard Suze Orman (American Financial Guru) say on her show that viewers in financial trouble should pay themselves first before they even pay their credit card payments, even if it means their score will dramatically decline. Is this a wise thing to do?
Answer:
First, Suze is an American Financial Guru. One must realize that the Canadian and American banking and financial system is almost night and day in most respects. They've been hit much harder in the US with their banking system and since they have very little regulation down there, many financial institutions operate like the wild west.
According to a statistic I heard on CNBC's On The Money, a few months ago, over 62% of American credit card holders had their credit card limits reduced (forced upon them) or closed entirely by the issuer. Thus, I can see where Suze would make such a recommendation. If someone was facing financial difficulties and paid their credit card diligently but had no savings for themselves, and then the issuer, out of the blue, cancelled their credit card (demanding full payment), it might be prudent to have some emergency cash savings. After all, survival at that point would be more important than worrying about a credit score that could later be fixed.
However, in Canada, we're not facing the same dilemma as our neighbours to the south. Sure, credit's a bit tighter here as it is globally, but we're on solid footing. Actually, the IMF (International Monetary Fund) has ranked Canada as the strongest banking system in the world. I've also spoken to the Canadian Banker's Association and the banks and credit card companies and they tell me it's business as usual - that they haven't suspended or closed credit card accounts due to the recession.
But a point of interest that one must be aware of, is that even if the credit card companies in Canada are not following what the US counterparts are doing, they are legally allowed to, should they choose to do so. A credit card works like a demand loan - the operative word being "demand" and demanded by your bank or the issuer. If you read the fine print when you signed up for your card, the company technically can demand payment in full at any time.
So having a solid slush fund of 3 -6 months savings is always a prudent suggestion. However, in our country, I would not recommend missing any credit card payments to throw it into a savings account as our system is pretty solid. Furthermore, one missed credit card payment can haunt your credit report for years and pulls your score down dramatically. Plus, if you're paying double digit interest rates on your card, it wouldn't make sense to throw it into a savings account paying a dismal rate of return.
If you'd like to read Suze's fully story on the issue, visit this link http://www.suzeorman.com/igsbase/igstemplate.cfm?SRC=SP&SRCN=suzescoop&GnavID=1&SnavID=134&NewsID=183
Be cautious when listening to media reports about the economy, banking and finance as the US system is dramatically different from ours.
Answering your credit questions - #3 - if I exercise the "skip a mortgage" payment option, will this affect my credit score?
Question #3:
If I exercise the skip a payment option with my mortgage, will this affect my credit score?
Answer:
No. This is an option that many Schedule One banks offer (i.e. the big banks such as TD, RBC, Scotia, etc.). Today, if you bank online, you can even apply to exercise the option immediately. However, it's still at the discretion of your lender if they'll allow you to do so. You can only skip a payment once a year and remember, you're now paying compound interest over the term of your mortgage by refinancing that skipped payment. Do so with caution and only when needed.
But no, as long as you haven't "missed" a payment, are on time with your payments, etc., this would not affect your credit rating.
P.S. Most Canadians don't realize that their mortgage is *not* reported on their credit report. So, ensure that your loan and credit card payments are always on time and in good order as your diligence in paying your mortgage is great, but won't help bring up your credit score. (By the way, Americans absolutely have their mortgage payments reported on their credit report and are shocked that we don't.)
If I exercise the skip a payment option with my mortgage, will this affect my credit score?
Answer:
No. This is an option that many Schedule One banks offer (i.e. the big banks such as TD, RBC, Scotia, etc.). Today, if you bank online, you can even apply to exercise the option immediately. However, it's still at the discretion of your lender if they'll allow you to do so. You can only skip a payment once a year and remember, you're now paying compound interest over the term of your mortgage by refinancing that skipped payment. Do so with caution and only when needed.
But no, as long as you haven't "missed" a payment, are on time with your payments, etc., this would not affect your credit rating.
P.S. Most Canadians don't realize that their mortgage is *not* reported on their credit report. So, ensure that your loan and credit card payments are always on time and in good order as your diligence in paying your mortgage is great, but won't help bring up your credit score. (By the way, Americans absolutely have their mortgage payments reported on their credit report and are shocked that we don't.)
Answering your credit questions - #2 - I called my credit card company and asked them to reduce my interest rate. Will this affect my score?
Question #2:
I called my credit card company to ask if they'd reduce the interest rate on my card. I was surprised that they were willing to negotiate and did in fact drop my rate as asked. After I hung up, I wondered if they'd see this as a sign of financial weakness? I can pay my bills and am not having troubles with debt - I simply wanted a better rate. But will this affect my credit score?
Answer:
No, it won't affect your credit score. For it to do that, you'd need to be late with a payment, over limit on your account or in default or non payment.
You really did do the right thing and most people are surprised that they can negotiate with their bank or credit card company. They won't always do it, but more often then not, when asked, they'll comply.
Give it a try and start negotiating yourself. Ask for the annual fee to be waived, a reduction in your credit card rate, mortgage/loan rate and more. A simple question could save you hundreds or even thousands of dollars!
I called my credit card company to ask if they'd reduce the interest rate on my card. I was surprised that they were willing to negotiate and did in fact drop my rate as asked. After I hung up, I wondered if they'd see this as a sign of financial weakness? I can pay my bills and am not having troubles with debt - I simply wanted a better rate. But will this affect my credit score?
Answer:
No, it won't affect your credit score. For it to do that, you'd need to be late with a payment, over limit on your account or in default or non payment.
You really did do the right thing and most people are surprised that they can negotiate with their bank or credit card company. They won't always do it, but more often then not, when asked, they'll comply.
Give it a try and start negotiating yourself. Ask for the annual fee to be waived, a reduction in your credit card rate, mortgage/loan rate and more. A simple question could save you hundreds or even thousands of dollars!
Answering your credit questions - #1 - why did my score drop when I closed out two accounts?
As per my post last week, let's tackle some great questions I've had recently from CBC Radioactive listeners.
Credit Question #1:
I had an excellent credit score of over 800 and have always paid my bills on time, etc. I closed out two credit card accounts as I didn't need them any more and hadn't used them in some time. Then, to my shock, I found out that my credit score dropped down to about 740. Why did this happen?
Answer:
The credit reporting agencies are vague with answers to questions like this. There's no specific criteria, that I know of anyway, that tells the public how much your score will go up or down based on closing accounts, opening accounts, etc.
However, yes, unfortunately, one's score will temporarily drop when closing an account. Why? I don't have the answer. This is the craziness of the credit reporting agencies and the credit card companies. This gentleman found out after the fact when calling back the credit card company that his score would indeed drop by closing the account. His question was, "why didn't they tell me this before I closed the account?"
When your score is being determined, all of your accounts are factored in. Having two credit card accounts with a zero balance is actually a good thing. Do not close these accounts. If you find that you're not using them, put the credit card in a safety deposit box, use it once a quarter and pay off the entire balance immediately, just to keep it in good standing and to continue to have positive reporting on your account. Ensure as well to check if the card has an annual fee. If you're not using the account regularly and do have a high annual fee (such as a points/reward card), switch it to a no fee or low fee option.
My suggestion for this gentleman, now that his accounts have been closed anyway and his score has dropped is to consider taking out a new credit card. Initially, his score will likely drop slightly by doing this, but within a few months of keeping a zero balance (but using it regularly and paying it off), his score will bounce back in no time.
I don't make the rules and don't even like most of them when it comes to the credit reporting agencies and financial practices of the credit card companies. Mostly, I don't like the limited amount of information and education on said practices for the general public. Hence, the entire point of this blog and my quest to educate the public on such issues. Be sure to drop me a line with your credit questions.
Credit Question #1:
I had an excellent credit score of over 800 and have always paid my bills on time, etc. I closed out two credit card accounts as I didn't need them any more and hadn't used them in some time. Then, to my shock, I found out that my credit score dropped down to about 740. Why did this happen?
Answer:
The credit reporting agencies are vague with answers to questions like this. There's no specific criteria, that I know of anyway, that tells the public how much your score will go up or down based on closing accounts, opening accounts, etc.
However, yes, unfortunately, one's score will temporarily drop when closing an account. Why? I don't have the answer. This is the craziness of the credit reporting agencies and the credit card companies. This gentleman found out after the fact when calling back the credit card company that his score would indeed drop by closing the account. His question was, "why didn't they tell me this before I closed the account?"
When your score is being determined, all of your accounts are factored in. Having two credit card accounts with a zero balance is actually a good thing. Do not close these accounts. If you find that you're not using them, put the credit card in a safety deposit box, use it once a quarter and pay off the entire balance immediately, just to keep it in good standing and to continue to have positive reporting on your account. Ensure as well to check if the card has an annual fee. If you're not using the account regularly and do have a high annual fee (such as a points/reward card), switch it to a no fee or low fee option.
My suggestion for this gentleman, now that his accounts have been closed anyway and his score has dropped is to consider taking out a new credit card. Initially, his score will likely drop slightly by doing this, but within a few months of keeping a zero balance (but using it regularly and paying it off), his score will bounce back in no time.
I don't make the rules and don't even like most of them when it comes to the credit reporting agencies and financial practices of the credit card companies. Mostly, I don't like the limited amount of information and education on said practices for the general public. Hence, the entire point of this blog and my quest to educate the public on such issues. Be sure to drop me a line with your credit questions.
Tuesday, May 19, 2009
The federal renovation tax credit, the federal home energy grant, the CORE furnace program and more!
Even in these tough economic times, more and more Canadians are considering renovating their homes this year; plus, the tax credits and rebates available make it more attractive than ever.
Keep in mind that each of these incentive programs has an expiry date, so be sure to check out each one to ensure you're not leaving your hard earned tax dollars on the table.
1. The Federal Renovation tax credit. Basically, if you spend at least $1,000 to a maximum of $10,000 before February 2010, you may be eligible for this 15% tax credit. Things that are included are paint, bathroom, kitchen, basement renos and more. What's excluded are things like furniture, tools, appliances, etc. For more info, visit http://www.cra-arc.gc.ca/gncy/bdgt/2009/fqhmrnvtn-eng.html
2. The Federal ecoENERGY grant. Unlike the Reno tax credit, this process requires an assessment before getting the work/upgrades done in your home. The ecoENERGY grant rewards the home owner for being more eco friendly by upgrading/replacing windows, doors, furnaces, water systems and more. For more info, visit http://oee.nrcan.gc.ca/residential/personal/retrofit-homes/questions-answers.cfm and http://www.ucahelps.gov.ab.ca/119.html and http://www.atcoenergysense.com/Tools+and+Resources/Grants+and+Rebates/
3. The CORE Program. The City of Edmonton has an initiative called the CORE program which assists low income residents in upgrading their furnace to a high efficiency model (up to $2,000 may be available if you qualify). For more info, visit http://www.edmonton.ca/environmental/documents/Low_Income_FAQ_-_2009-02-05.pdf
4. Garage and Basement Suite incentives. Lastly, the City of Edmonton has also introduced a secondary suites incentive program. Years past, a basement or garage suite in your home, rented out, was technically illegal, although many residents did it anyway. Due to the shortage in affordable housing over the past several years, not only has the City loosened the noose, they've created an incentive program, throwing dollars your way (if you qualify) to renovate your basement or garage if you're willing to rent it out for a period of time to a qualifying renter. For more info, visit http://www.edmonton.ca/for_residents/resident_services_programs/cornerstones.aspx
Keep in mind that each of these incentive programs has an expiry date, so be sure to check out each one to ensure you're not leaving your hard earned tax dollars on the table.
1. The Federal Renovation tax credit. Basically, if you spend at least $1,000 to a maximum of $10,000 before February 2010, you may be eligible for this 15% tax credit. Things that are included are paint, bathroom, kitchen, basement renos and more. What's excluded are things like furniture, tools, appliances, etc. For more info, visit http://www.cra-arc.gc.ca/gncy/bdgt/2009/fqhmrnvtn-eng.html
2. The Federal ecoENERGY grant. Unlike the Reno tax credit, this process requires an assessment before getting the work/upgrades done in your home. The ecoENERGY grant rewards the home owner for being more eco friendly by upgrading/replacing windows, doors, furnaces, water systems and more. For more info, visit http://oee.nrcan.gc.ca/residential/personal/retrofit-homes/questions-answers.cfm and http://www.ucahelps.gov.ab.ca/119.html and http://www.atcoenergysense.com/Tools+and+Resources/Grants+and+Rebates/
3. The CORE Program. The City of Edmonton has an initiative called the CORE program which assists low income residents in upgrading their furnace to a high efficiency model (up to $2,000 may be available if you qualify). For more info, visit http://www.edmonton.ca/environmental/documents/Low_Income_FAQ_-_2009-02-05.pdf
4. Garage and Basement Suite incentives. Lastly, the City of Edmonton has also introduced a secondary suites incentive program. Years past, a basement or garage suite in your home, rented out, was technically illegal, although many residents did it anyway. Due to the shortage in affordable housing over the past several years, not only has the City loosened the noose, they've created an incentive program, throwing dollars your way (if you qualify) to renovate your basement or garage if you're willing to rent it out for a period of time to a qualifying renter. For more info, visit http://www.edmonton.ca/for_residents/resident_services_programs/cornerstones.aspx
Thursday, May 14, 2009
CBC Radioactive - answering more of your credit questions
On Monday's show, I addressed the ultra popular topic of credit yet again. This time, I had a number of excellent questions from listeners and tackled as many as possible. If you missed any of our past shows which dealt extensively with repairing and maintaining your credit standing, visit my website at http://www.kelleykeehn.com/ and click the CBC logo for past issues. I've also blogged extensively about the subject, so feel free to have a look at past posts.
Check back in the next few days and I'll post the questions and answers.
Check back in the next few days and I'll post the questions and answers.
Tuesday, May 5, 2009
CBC Radioactive - where do your city taxes go?
Yesterday Mark and I discussed where our city taxes go and what we're actually paying for.
I met with the city of Edmonton's CFO, Craig Warnock to find out exactly where and how our hard earned tax dollars are being allocated. And if it's a tough pill to swallow paying that ever increasing property tax bill this spring, perhaps it will help if you knew (it lessened the complaining a bit for me) how our money is being spent.
Of the total operating budget for the city of Edmonton ($1.6 billion), $827 million is from taxes. And did you know (I didn't), of all the taxes we pay, provincial income tax and federal tax combined with our property taxes, only 4% of the total tax we pay is received by our city.
I met with the city of Edmonton's CFO, Craig Warnock to find out exactly where and how our hard earned tax dollars are being allocated. And if it's a tough pill to swallow paying that ever increasing property tax bill this spring, perhaps it will help if you knew (it lessened the complaining a bit for me) how our money is being spent.
Of the total operating budget for the city of Edmonton ($1.6 billion), $827 million is from taxes. And did you know (I didn't), of all the taxes we pay, provincial income tax and federal tax combined with our property taxes, only 4% of the total tax we pay is received by our city.
- Our municipal taxes are used to fund things such as police, emergency services, transit, roads, libraries and more.
- 17 cents of every dollar goes to policing - the highest cost.
- 12 cents of every dollar to transit - one City Counsel's top mandates is public transportation and creating LRT nodes on high density sites around town.
- 12 cents of every dollar goes to fire and emergency services
- 11 cents of every dollar to roads.
- 10 cents of every dollar to park and community services.
- Of the 7.3% tax hike we're facing this year, 2% of the tax increase is being used to fund neighbourhood renewal - a proactive approach the city's using to protect and repair the city's infrastructure before it becomes more costly down the road (they tell me that something as simple as applying a sealant to a neighbourhood's sidewalk could save thousands down the road)
- The city's revenue - 52% from taxes and 48% from other sources (Epcor payments, user fees from transit and recreational centres, investments, etc.)
- And due to the recession, we're saving on infrastructure costs as the city was estimating 2009 building costs to increase by 15% but have actually dropped by 10% thus saving us taxpayers nearly 25%.
Love your taxes or absolutely hate paying them, ensure to get them in on time. If you miss the June 30th deadline, you'll pay a whopping 6% penalty on July 1st and 1% per month from August to December.
If you have a suggestion for the city or question, please post it here and/or contact your local counsellor and let your voice be known. It does make a difference!
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