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Finance

What is the US Fiscal Cliff?

EconomicsEdward KiledjianComment

Read any newspaper, watch any newscast or listen to any economics radio show and you will hear the term fiscal cliff over and over (even outside of the US). Many of my non US readers may be wondering, what is this cliff and why is everyone so excited about it.

What is the fiscal cliff

The fiscal cliff is a new term to describe a confluence of events that will occur at the end of 2012 unless US elected officials can come to a financial agreement and change course. In simple terms, it is the end of the George Bush tax cuts (he implemented almost 10 years ago) and the automatic activation of many US Government budget cuts. The fear is that raising taxes and cutting government spending may push world economies back into a recession.

If there is a will, there is a way to avoid this so called cliff but a majority of politicians will have to agree on a bipartisan fiscal package. Republicans want low taxes and low government spending. Democrats want higher taxes so the government can do more spending. It will be interesting to see if 2 diametrically opposed positions like this can be reconciled in less than 40 days.

A game of chicken

There are politicians on both sides of the isle that are actually advocating a do nothing approach. They believe if they hold steady the other side will eventually panic and cave in. This may work but it is a strategy where there can be no plan B.

Hopefully calm and collected thought will prevail and a mutually agreeable solution will be reached before year end.

Canadians can request their credit files

FinanceEdward KiledjianComment
There are two primary credit collection and reporting agencies in Canada:
  • Equifax Canada
  • TransUnion Canada
These agencies collect, store, process and report on the credit histories of millions of Canadian. Your credit file will determine credit eligibility, interest rates you pay and in extreme cases, security clearance for certain jobs. So it is a good idea to know what is in your credit file with each of these agencies and to ensure all the collected data is accurate.

You have the right

As a Canadian, you have a government given right to obtain a copy of your credit file (from each agency), once every 6 months (via mail). 

Pro 

  • You get a copy of your credit file for free
  • You get to see your file and correct inaccuracies
  • You can see what credit cards have been opened in your name which can help detect identity theft 

Con 

  • The free version does not contain your credit score
  • It takes between 1-2 weeks to get the information
  • The information is sent via regular mail 

Alternatives

You can always go to the credit agencies website and use one of their consumer credit access services online. 

Pro

In addition to the mail benefits, you also get: 

  • instant access
  • you see your credit score and had the biggest impact on it
  • provides guidance on how to improve it. 

Con 

  • Costs money 

What is a credit score?

Your credit score is built using a super secret formula by the credit agency to summarise all your credit history in a simple to use score for lenders. It is an indicator of financial health at a given point in time, based on the information available to the agency.

Although each agency uses its own proprietary score, it typically runs from 300-900 (the higher the better). The higher the score, the healthier you are financially and the more likely you are to get better lending terms (aka lower interest rates).

The credit agencies don't determine who is or should be credit eligible, that is up to each individual lender. Between the 2 agencies, the Equifax one is generally considered the gold standard and that is the score I would pay more attention to.

Unless you are about to make a big purchase, I don't think you need access to your score. I recommend getting the free credit report every 6 months and buying access to the Equifax score a couple of months before you make that purchase.

What's a credit rating

When you receive your credit file, you will notice each history contains a letter and a number. The letter is used to identify the type of credit given:

  • I is for installment based credit (aka car loan, mortgage, etc). This is a situation where you borrow money in exchange for repayment at fixed intervals.
  • O is for open credit. This can refer to things like lines of credit where a lender has allowed you to borrow on an when and as needed basis.
  • R is revolving credit and refers to credit cards.

Next to the letter is a number. Here is the meaning of each number 

  • 0 is too new to rate
  • 1 Pays within 30 days and not over 1 payment past due
  • 2 Pays in more than 30 days from payment due date but not more than 60 days. Not more than 2 past due payments.
  • 3 Pays in more than 60 days but not more than 90 days. Not more than 3 past due payments.
  • 4 Pays in more than 90 days but not more than 120 days. Not more than 4 past due payments.
  • 5 Account is at least 120 days late but has not been rated a 9.
  • 7 Paying back through a special arrangement with the lender.
  • 8 Repossession (voluntary or ordered).
  • 9 Bad debt sent to collection, moved without providing a forwarding address or declared bankruptcy.

How do I request it?

To request your free (by mail) credit file, click on these links. I added the links straight to the forms because the agencies make it time consuming to find the links to the free report.

Prize Linked Savings - encouraging people to save

Finances, MoneyEdward KiledjianComment

We all know people love to play the lottery. For only a couple of dollars, they can dream big dreams for a week. The sad truth is that many people choose to play the lottery instead of building a nest egg. After all, putting a money aside is good but it doesn’t carry the chance of winning big. Or does it?

There is an interesting invention (in some parts of the world) called a Prize Linked Savings account. It allows people to save money while giving them the thrill of the lottery (all without risking a penny). The concept is simple, it collects the interest accumulated by all of the savers in the plan and awards it (via random draw) to one lucky person. Everyone else get’s to keep their money. In the UK, it is called a Premium Bond.

A South African bank tried this scheme to encourage the population to save. The response was so overwhelming that it impacting the South African government’s lottery revenue so they sued the bank and stopped the program.

A Prize Linked Savings Account test was run in the state of Michigan and the results were interesting: “56 percent of the Michigan participants in the program were non-savers prior to the program”. 

 

Unfortunately many jurisdictions (including my own – Canada) make this type of program illegal to ensure there is no competition to the state run lottery corporations. Changing the laws to allow for these types of unique and attractive savings mechanisms is simple but politicians lack the will to push them through. After all, government is addicted to spending our money.