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July 18, 2008, 6:00 am

The Smith Manoeuvre Affects Your Beacon Score

by: The Financial Blogger    Category: Credit Rating & Credit Bureau,Smith Manoeuvre

For any Canadians, having a tax deductible mortgage is a real dream. Well this dream is partially realisable through a leverage technique called the Smith Manoeuvre. However, setting up this investment strategy could hurt other part of your financial situation. Since you need to borrow while doing the SM, this will influence your credit score. The Smith Manoeuvre is not really the ultimate responsible of the modifications on your credit bureau. It is the financial product used to borrow money.


The purpose of setting up a SM is to get your mortgage tax deductible. In order to achieve the strategy, you need to leave your mortgage as high as possible and flip the non tax deductible debt (i.e. your original mortgage) to a line of credit account that will be used to invest (leverage principles). Therefore, you will need a Home Equity Line of Credit (HELOC).

About a year ago (maybe it’s two, I am not too sure about the time frame), Canadian financial institutions decided to report mortgages and HELOC to the credit bureau agencies such as Equifax or Transunion. It was previously a regular practice to not declare such information in order to protect your clients from competitors.

However, with the financial crimes increasing, banks had no choice but to report any credit activities in their branch. Therefore, we started to see mortgages and HELOC account our credit bureau. In regards to mortgages, there is not much impact on your credit score as long as you pay on time. On the other side, it is a different story for home based lines of credit.

Actually, making your required payment on time is not enough when it comes down to revolving credit (i.e. credit cards and lines of credit). The amount used compared to the amount granted is important also. Since your HELOC is probably your biggest revolving credit, its weight on your debt to available credit ratio is huge.

If you are using more than 80% of your revolving credit, you start to get seriously penalized. For example, I have my whole mortgage on a line of credit that is maxed out since I do the Smith Manoeuvre. I recently checked my Beacon Score and it dropped about 50 points since last time I checked. Nothing had changed in my situation beside the fact that my HELOC is now reported. Fortunately for me, I used to have a Beacon near 800 points. Therefore, it didn’t change much my financial situation.

I thought you may want to check your credit bureau before doing such strategy or even before transferring your mortgage into a HELOC if you had credit issues in the past. Home line of credits are the most flexible and useful type of mortgage. However, that will surely not help your credit score!

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June 25, 2008, 6:00 am

How Credit Cards Help You Pay Off Your Mortgage

by: The Financial Blogger    Category: Credit Rating & Credit Bureau,Pay off your Debts


Here is a guest post from Debbie Dragon. She is a writer for CreditorWeb.com where she writes about
credit cards, rewards programs and finances.

When most people think of credit cards, they cringe at the thought of paying high interest rates and finance charges. Who really wants to pay two or three times the cost of an item by making monthly payments? If the right credit card is used correctly, though, it can actually help you pay off your existing mortgage – or build up credits to help you pay for your future mortgage.

 



While not yet as common as the frequent flier rewards programs or the cash back rewards programs, there are an increasing number of credit card companies offering rewards in the form of rebates that are applied to the principal of your mortgage, and helps reduce what you owe. If you don’t have a mortgage yet, there are a handful of other cards that allow you to build up your credits by using the card, and then use them towards the purchase of a home.

Bank of America’s Home Advantage Credit Card offers one of the leading mortgage rewards programs. Using the credit card earns you points; and every 5,000 credit card reward points can be redeemed as a payment towards your mortgage principal.

For people who have not yet purchased a home, you might look into the Citi Home Rebate Platinum Select MasterCard. This card offers a high percentage cash back, in the form of rebates applied to a mortgage, of up to 6% of certain categories of purchases. For example, when you use the Citi Home Rebate Platinum Select MasterCard to pay for utility costs, 6% of those purchases made with the card will be credited to a statement on your account and later used to pay down a mortgage. Once you buy a home, you can continue to apply your rebates to the principal of the mortgage and pay it off faster.

The majority of mortgage amortization schedules look similar in that the first several years of monthly payments tend to be almost all interest payments, with only a small amount of the payment going towards the principal balance of the loan. If you were able to increase the principal payment each month, by double, you could pay off the mortgage in half the amount of time. This is why it’s possible that a small additional payment made on a mortgage regularly will work to reduce the amount you owe significantly.

When your credit card rewards program contributes your earned rebates to the principal of your mortgage, those rebates can actually save several months of payments and several thousand dollars in interest over the course of your mortgage. The Bank of America’s Home Advantage Card website indicates that paying $50 every three months to your mortgage through a credit card rebate program (or on your own) would save you four months on your loan term and over $3,300 in interest.

In order to make any credit card rewards program effective, you would want to use that card to make most of your monthly purchases and as your primary form of payment, while paying your balance off in full at the end of each month. When you pay the card off in full, you avoid interest and finance fees, but still earn the highest level of rewards possible to be applied to your mortgage and help you pay it off faster.

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January 23, 2008, 7:00 am

Your wife may forgive you, the bank will not.

by: The Financial Blogger    Category: Banks and You,Credit Rating & Credit Bureau

I recently had to work with the following situation. I received a file for a credit product as usual. When I started working on it, the very first thing I looked at was the client’s credit bureau. It was simply awful. This guy had 5 or 6 credit accounts that were late last year. Most of his late payments happened during the same period. He went on the verge of being sent to collection agencies on many of them. Let just say that things were not as bright as the sun in Jamaica!



So I stop looking at the file right away; there is no way for me to do anything for this guy anyway. The credit department would just laugh at me if I wanted to submit this file. Sometimes, you know that the patient is already dead before you try to save him.

So I when I am about to decline the file, I give a call to the guy and explain him why. Then the story starts:

“Well, you know, I went through a hard time. There was that period of my life where I was completely lost and I totally forget about my credit cards. Things went so bad with my wife that I had to leave the house for a few weeks. Then I used my credit cards to pay for my expenses and I could not keep up forever.

However, now things have settled down. In fact, I’m back with my wife and we solved our problem. My bills are now up to date and I even made a lump sum payment on my mortgage at the end of the year. I’m telling you, I’m back in business.”

I listened carefully to his story as he sounded genuine. Unfortunately, his late payments kicked down his Beacon Score pretty hard. In fact, this was the type of file that is being declined by our banking system without going to a credit analyst. I felt bad as I could not do much for him at that time.

This is at this point that I thought about a solution. In fact, chances were that her wife has an impeccable credit. Therefore, I asked him to apply with his wife as main applicant so we have better chance to get his request approved. He agreed and was quite happy to have an alternative.

Since I did not see his wife’s profile yet, I can’t say if they will be approved or not. However, there is one thing I know; if his wife may forgive him, the bank is impetuous when it comes down to late payments. In fact, this dark period of his existence might have length only 3 months but it will show on his credit bureau for the next ten years. Unfortunately, banks will remain reluctant to grant credit this individual until these issues are washed away.

Therefore, always make sure that you make the minimum payments on all your credit cards, even when you go through rough times!

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“Well, you know, I went through a hard time. There was that period of my life where I was completely lost and I totally forget about my credit cards. Things went so bad with my wife that I had to leave the house for a few weeks. Then I used my credit cards to pay for my expenses and I could not keep up forever.

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November 21, 2007, 7:00 am

Will A Bank Sleep With You? Understanding Credit As A Relationship Part2

by: The Financial Blogger    Category: Banks and You,Credit Rating & Credit Bureau

cheater Yesterday, I wrote about how to build a strong credit history. As an example, I use a relationship between two individuals; Stephen and Lara. Today, we will see how Stephen can easily destroy his relationship with Lara. As a matter of fact, your credit score can be torn apart pretty quickly too. Stephen and Lara are now making a beautiful couple after a few months of good relationship. Let’s see what happen when things turn sour.
Huh?! No, I wasn’t looking (minor things that would hit your credit score)

Lara is starting to have doubt on Stephen. She thinks he is looking at other girls once in a while. Stephen denies those affirmations but his friends are telling the opposite. Do not try to lie to a women, they have a sixth sense for this kind of stuff. So do banks. It’s easy for them to pull out another credit check upon renewal of your credit accounts and acknowledge that you applied for more credit cards. The number of inquiries (looks) and the number of recent credits (a new cute friend) will hurt your Beacon Score but in a minor way. Lara will start to watch Stephen closer to make sure he doesn’t go anywhere else.

Sorry honey, but I will be late tonight, we have a case to finish (more credit issues)

Stephen is starting to make up excuses, his friends are shy to speak to Lara. The doubt is growing as there are many indications that Stephen is not being 100% honest in this story. The explanations are not consistent and it is obvious that Stephen is lying. When you start getting late on your payments, banks are getting very suspicious. They will call you and ask questions. As it is the case in a relationship, it will be worst if you start lying.

Lara… this is not what you are thinking it is… (severe credit issues)

That’s it, Lara knew it! She finally has the proof that Stephen is lying…. in the bed with another women. The trust has been broken and so the relationship. Lara will not be able to look at Stephen and believes him when he says that he loves you. Well being late on cards and going to the point of having a collection agency on your back or declaring bankruptcy is exactly the same thing as cheating on your spouse. Credit is all about trust and you perfectly destroyed any hope of this happening.

Come on Lara, it was a mistake, why can’t we get back together like the old times? (trying to rebuild your credit history)

Many people like Stephen, think they can get away with their “small mistake” and get back with their original situation. So when the bank declines your application in regards to credit issue, ask yourself this question: “Would Lara sleep with Stephen again after what he did?”.

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November 20, 2007, 7:00 am

Would A Bank Sleep With You? Understanding Credit As A Relationship

by: The Financial Blogger    Category: Banks and You,Credit Rating & Credit Bureau

Throughout my years working as a banker, I found out an interesting analogy between your credit behaviours and how ones can manage his/her relationship. Today I will write a 25 years old man; Stephen (the customer) and a nice young lady of the same age; Lara (the bank). In this first part, I will write about building this relationship. On part two, I will explain how people can ruin it. So let’s see what happens when Stephen meets Lara. Remember, credit is all about trust. relationship
Don’t try to sleep with her the very first night (credit history)If Stephen is trying to hard on the first night, Lara may be scared and may want to put an end to the relationship before it even starts. When you have no credit history and you are trying to get a credit card, a car loan, a mortgage and a flex line for your renovation at your very first meeting at the bank, you will be declined in a heart beat. Bank, just as Lara, likes to know more about who they are dealing with. Some banks might lend you the money without any questions on the very first date, but be careful, you might end-up with a huge bills in interest and other charges. Those kind of girls are expensive and so are banks.

Be a reliable friend (experience with other lenders)

Let’s assume that Stephen is a real gentlemen and that he did not try to push things with Lara. After a couple of dates, Lara is starting to get interested in Stephen. This is when she will ask her friends and maybe his friends to know more about him. She will pull out his “relationship bureau” to see if he had any issues in the past. Lara is not necessarily looking for long term relationship with his ex-girlfriend but more about his trustworthiness. By asking friends about their perception of Stephen, Lara will have a good idea if Stephen is reliable, honest and sincere.

Be on time, buy flowers, be consistent (general credit behaviours)

Stephen is now in a relationship with Lara (man, it’s not an easy job to keep her happy!). They have been together for a few months and things are going good. Stephen is never coming late from work and he his always ready when they have to go out. He buys her flowers and other nice gifts for her birthday and other occasions. But the most important part, he is honest and consistent. Lara truly believes him and he says that he loves her. Fortunately, banks are not that demanding 😉 In fact, they just want to make sure that you are making all your payment on time and that you don’t lie about your source of income and your assets. As long as you can proof that you are a honest man, both Lara and the bank will trust you back.

As you can see, building a strong credit score is not that hard. It requires time, consistency and honesty. I admit that human relationships are more complicated. But in the end, it all comes down to trustworthiness.

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