Credit defined

We're all about the metaphors and similes here at Loonies And Sense. A few months back, I posted about another blog that had described easy credit as a bottomless cookie jar. Well, a recent post at Consumerism Commentary once again has me all revved up with a "new" way of thinking about credit.

Smithee's post on credit cards that already follow the rules laid out in the new Credit Cardholder's Bill Of Rights in the US discusses the practice of double-cycle billing:

Avoid double-cycle billing (imagine paying your rent for May based on how many days you lived there in May and April)

Maybe this is grounds for me to turn in my PF-blogging credentials, but the concept of credit as renting money really hit me when I read this. Interest is the rent that you pay for the use of the money, and heaven help you if you don't return the money in good condition when you're done with it.

This is an incredibly simple concept, and it strikes me how differently people tend to think about debt than about other items they might rent. Nobody would refer to a rented DVD, a rental car, or a rented apartment as their own property, but try to convince someone that the new car they just financed isn't strictly their own property, and you've got an uphill battle ahead of you.

This concept of renting money also underscores the difference between "good" and "bad" debt: just as we derive utility from the tangible things we rent, we can derive utility from the money we rent. With leveraged investing, it's possible (though by no means guaranteed) that you will earn enough money to pay the interest and repay the borrowed amount. Of course, we can also use this rented money to dig ourselves into a hole. If you spend the money on something that you are not able to convert back into money (i.e. depreciating assets, consumables, etc.), then you no longer have the money to return to the lender. Kind of like handing the keys of a rented apartment to a complete stranger: it makes it kind of tricky to get out of your lease.

It's hardly groundbreaking insight, but it's a new way for me to think of credit and debt, and I found it really interesting.

Experian discontinuing Canadian operations

I recently requested copies of my credit report from the three reporting agencies in Canada. It took a few weeks to get al three reports, with Experian's report finally arriving last Thursday. When I looked over the package from Experian, I was surprised to see their cover letter stating that they will cease operations as a Canadian credit bureau effective April 17. Here's the notice from their website (emphasis mine):

Effective April 17, 2009, Experian will unfortunately discontinue its Canadian consumer credit bureau operations as a result of the very difficult economic environment in Canada and around the world, which Experian believes will persist for some time. This means that as of April 18, 2009, Experian will no longer be providing credit reports out of its Canadian database regarding any consumer in Canada.

We will continue to respond to ongoing consumer requests for copies of credit reports, as well as handle disputed items and other consumer assistance until April 17. After that date and upon completion of any disputes in process, all consumer information will be deleted from our database and will no longer be available to consumers or creditors.

If you have not previously obtained your credit report from us or initiated a dispute on your Experian credit report, you may wish to contact one of the other credit bureaus for assistance.

So, after this Friday, Experian Canada is closing shop and destroying its records.

That's too bad; their report was by far the slickest-looking of the three that I received this time around.

I've updated my credit report post with this information.

When you can afford to make the "wrong"choice

Trent at The Simple Dollar recently bought a new 2009 Prius, and took out a loan at 4% to cover the majority of the purchase price. Those who have been reading Trent's blog over the years know him as an advocate of frugality and paying cash, so this decision to finance the purchase has generated a lot of discussion among his readers. He addressed these concerns in a post today justifying his decision.

A lot of the thinking behind the pay-cash-don't-finance argument follows the line of "Won't it feel great when you walk into the dealership, write a cheque for the negotiated price of the car, and drive off the lot without a new loan hanging over your head?" The planning and discipline that it takes to save up enough cold, hard cash to pay for a new (to you) car are the same traits that help people get out of debt, plan for retirement, and become financially independent. When you look at the number of people who still live well beyond their means, spending more each month than they earn and mortgaging their future for today's wants, it's not hard to see that "save up and pay cash" is well-needed advice.

The difference here, though, is that Trent had saved up enough to pay for the car, and chose to finance the purchase (at a very low rate) in order to keep cash on hand for emergencies and any other opportunities that might come up along the way. This is very different than someone living paycheque-to-paycheque signing on for a 7-year loan at 12%. The interest on the loan may well cost him in the long run, but he's worked to put himself in a position where he can find a compromise rather than needing to make the perfect, by-the-numbers decision.

Much like the idea of getting ahead of the treadmill as opposed to getting off it, the message here is that, when you plan and save, you put yourself in a position of choice, and it can be surprising just how many options become available to you.

Credit reports information updated

With the recent news that Experian is ending its relationship with myFICO in the US, I decided to check the information in my free credit reports post.

Turns out that Northern Credit Bureaus (formerly an Experian-owned company) now operates in Canada as Experian Canada. The top-level URL remains the same, but my links to the credit report request forms were broken, so I've updated the post. There's now a one-page PDF form that you can print, fill out and mail to Experian's offices in Toronto.

The information for Equifax and TransUnion has not changed.

Updated: Free credit reports in Canada

Well that's embarrassing.

Last Monday, I posted that I had finally contacted Equifax to correct my postal code (a matter of replacing a "6" with a "5"), after four straight months of meaning to get around to it.

Once I finally looked at the paperwork in detail, it turned out to be as simple as faxing them a form with some supporting documentation. No stamp for snail mail, no waiting on hold with their customer service department. Just filling out a form, photocopying some statements and identification, and sending a fax.

Today I received an updated copy of my credit report in the mail, and my postal code has been correted.

For those keeping score, consider the following:

• Loonies And Sense's turnaround time: five months from receiving initial Equifax report to sending fax with updated information


• Equifax's turnaround time: three days from receiving fax to updating records and sending out new copy of report


• Canada Post's turnaround time: six days to deliver updated credit report

My math may be off, but I think I might just be the weak link in that chain.

As embarrassed as I may be, at least it's something I can officially check off my goals for the month. That's got to count for something.

Lease no more?

The decision of whether to buy or lease an automobile just got a lot simpler for Canadians, as GM Canada announced yesterday that it is getting out of the leasing business effective August 1. This is in response to the fall in resale values of SUVs and pickup trucks with the recent surge in oil prices: off-lease vehicles are becoming a hot potato, and GM doesn't want to be the one that gets burned. So far, Chrysler Canada will continue to offer leasing, although their U.S. counterpart announced on Friday that they are exiting the leasing market.

An interesting aspect of GM's announcement involves the alternatives that they are suggesting:

Instead, the sales leader in the Canadian market will offer alternatives such as interest-free loans for as long as six years in hopes of keeping monthly payments on vehicles purchased with loans close to what monthly payments would have been if the vehicles were leased.

This represents a major change in the way consumers "buy" vehicles. My thoughts on GM's product offering aside, taking away the option of a low monthly payment will likely keep a lot of potential customers out of the new-car market. I think this is a good thing, in the long run, if it gets people out of the monthly payment mindset and forces us to rethink what we can really afford, but this benefit won't come without some initial pain.

Like the rest of the easy-credit business that has been blowing up recently, we have some rocky times ahead of us before we get past the consequences of our poor choices.

The SUV's latest victim: Leasing

Keeping Things Undone

An anonymous commenter pointed out last week how much I've been prattling on about updating my address with Equifax to reflect my correct postal code, something I've been planning to do since April. This task seems to have found a permanent home in my monthly goals, without ever really being addressed.

There are a few of reasons I've been slow to act on this:

• The impact of the change is minimal. Other than the postal code, all the information in my report is accurate. Not only that, but the report was successfully (and promptly) delivered to my home address in spite of the incorrect postal code, so this is really having very little effect on me.


• The mechanism for making the change is unclear. The last page of the report is a "Consumer Credit Report Update Form", but the layout of this form seems more geared toward disputing incorrect items (such as judgments, invalid trade lines, etc.) in your report than updating personal information.


• Credit bureaus have a reputation for being difficult to work with. I really don't know how much resistance I'll encounter when I make the request, and this uncertainty is making me procrastinate.

These three factors have been keeping me from biting the bullet and getting this thing done. However, thanks to Anonymous' comment, I have decided to suck it up and make the change.

This afternoon, I faxed the update form to Equifax, along with copies of two credit statements with my current address, and a photocopy of my driver's licence and credit card. We'll see how smoothly the process goes from here.

This is a small, small, small victory, but it's an item that I can finally cross off my to-do list.

Welcome to KTU: productivity, the Loonies And Sense way!

The P2P lending minefield

Social lending has been in the news a lot in the past few months. Canada's first P2P lending community launched in February, and was promptly shut down pending resolution of some regulatory issues. As of today, the IOU Central platform is still "operating with limited functionality".

This week has seen some more interesting news on the P2P lending front. On Monday, Lending Club announced that they would suspend the ability to invest using their site, while keeping the borrowing functionality intact. Yesterday, I received an e-mail from CommunityLend, stating that they are getting close to a launch, and are asking for input on forming "borrower groups", presumably to assess the demand for loans so they can attract sufficient investors when they launch.

I imagine that, given the issues that have hit IOU Central, CommunityLend is being extra cautious, trying to avoid any false starts. This seems to be a prudent approach to take, particularly in such a new and untested (at least in Canada) industry. I'll be keeping an eye on this site; I have a feeling that when they open their doors, things will get interesting.

Here's the text of CommunityLend's e-mail:

Hello and Good-day from CommunityLend

If you are new to the CommunityLend mailing list, welcome to the family and thank you! Your support means everything to us. If you have been around for a while, you will remember that about four months ago we sent out an email with a few major announcements, including our funding and expanded team. We have kept relatively quiet over the past ten months while we have been consulting with the Canadian regulators. At the beginning of April we decided it was time to begin the ramp up to our launch.

Today we want let you all know that our site has received a major overhaul. The new look and feel is based on our launch design and we would love to hear what everyone thinks!

As you may have guessed we are now getting close to launching our service. In the next few months we will be regularly posting on our newly launched blog and making important announcements in our press release section. Our most recent announcement is on the formation of our Board of Advisers. We are very excited to have so much active support from such a fantastic group of people.

We would also like to draw your attention to our expanded management team, which is constantly growing as we move closer to full operations.

Finally, we would like to request that anyone who is interested in setting up a borrower community on CommunityLend contact Dave Coleman, our Community Advocate. Communities can be a great way to connect with people who share similar interests and help each other out financially. Examples are ethnic groups, interest groups, or even industry groups that want to use CommunityLend as a way to help finance their clients; the list goes on. If anyone is interested in starting a community, please do not hesitate to contact us.

Please note however that at this time, we are looking for borrower groups only. We will hold off on the creation of lender groups until our regulatory applications are approved and we are closer to launch.

Once again thank you for your interest in CommunityLend. Your help and support is invaluable!

-The CommunityLend Team

TransUnion finally reports for duty

I requested my credit report from the three Canadian credit bureaus on February 7. This was my first time ever obtaining my report, and I opted for the free version, which must be requested offline, as opposed to the version available online for a fee. For Equifax and Experian (aka Northern Credit Bureaus), I was able to send my request by fax. TransUnion, however, does not list a fax number, so I had to mail my request to their Consumer Relations Centre in Hamilton. In all three cases, the request consisted of a form filled out with my personal information, as well as photocopies of two pieces of identification.

Equifax and Experian both responded promptly, and I had these two reports by the end of February. Equifax has an incorrect digit in my postal code, but other than that, the information in both reports is 100% correct. All trade lines listed are actual credit accounts that I recognize, and each line has the correct age, limit, balance and status. I was relieved to see no evidence of any identity theft. However, as March rolled along, I became increasingly uneasy at the lack of response from TransUnion.

Well, come Friday March 28, I finally received my credit report from TransUnion. The "file pull" date listed on the report was March 24, so it seems to have taken them 40 days, or just under six weeks, to fulfill my request, assuming four business days' delivery time at either end of the transaction.

As unimpressed as I am with TransUnion's turnaround time, it was interesting to note the differences in the content of the three reports. Equifax and Experian seemed pretty similar in the number and type of trades that they listed, while there were a number of accounts that were absent from the TransUnion report.

I think I'll still make a point of requesting all three reports once a year, but next time I'll make sure I send my TransUnion request by registered mail. It's just too unnerving having all my personal information floating out there for over a month with no idea of whether it's reached its destination.

More on P2P lending

I'm very interested in the recent developments in Canadian P2P lending. I haven't been involved in these new projects, beyond signing up for e-mail updates at CommunityLend, but I've kept an eye out for news.

Today in the RedFlagDeals.com forums, I found a quoted e-mail from Phil Marleau, the president and CEO of IOU Central:

Dear IOU Central user,

First and foremost I would like to thank you for being a pioneer in a brand new idea that one day may revolutionize the way Canadians do banking. Without you, IOU Central would not be possible. Secondly, I would like to apologize for any inconvenience the recent turn of events may have caused you.

Last Thursday, the Autorité des Marchés Financiers (AMF) requested that all new activity on our website be stopped. We of course complied immediately and stopped all lending and borrowing activities. IOU Central received legal advice from a major Canadian law firm prior to its launch with respect to the Canadian regulatory environment; however, IOU Central is acting in a very new area. We are the first in Canada to offer peer-to-peer lending, although similar models are operating in the US and the UK. We are committed to working with all the relevant regulatory bodies in order to continue to offer our service to borrowers and lenders in full compliance with applicable regulations. We have initiated discussions with the AMF in order to resolve the matter as soon as possible. In the meantime, our site continues to operate with limited functionality.

Thank you for your patience and understanding. We will update you on any new developments.

Best regards,
Phil Marleau
CEO & President

So it looks like they have received a "cease and desist" order, after launching their service without having fulfilled all the regulatory requirements. I'll be interested to see whether this kills their venture, or they're able to satisfy the regulators and get back up and running.

Update

The AMF has released a communication (PDF) regarding the action against IOU Central:

IOU Central Inc.
ORDERED TO CEASE TRADING AND ACTING AS SECURITIES ADVISER

Montréal, March 3, 2008 – At the request of the Autorité des marchés financiers (AMF), the Bureau de décision et de révision en valeurs mobilières (BDRVM) issued an order on February 27, 2008 against IOU Central Inc. ("IOU") to cease any activity, directly, indirectly or by Internet, in respect of a transaction in a form of investment governed by the Securities Act (the "Act"), including any activity as a securities dealer. The BDRVM also ordered Philippe Marleau and all directors, officers, employees, representatives and mandataries of IOU to cease any activity in respect of a transaction in securities in a form of investment governed by the Act for and on behalf of IOU, including any activity as a securities dealer.

IOU's website (www.ioucentral.ca) is an internet-based market that enables people to borrow money directly from and lend money directly to other people. According to the AMF, these activities violate the Act.

In its decision, the BDRVM expressed concern about the following AMF allegations in particular:

• IOU, Philippe Marleau and the other officers assisted borrowers in distributing debt securities to lenders without a prospectus from the AMF.


• IOU, Philippe Marleau and the other officers acted as securities dealers via a website without being registered with the AMF.


• The services offered through IOU's website were market activities governed by Regulation 21-101 respecting Marketplace Operation, but IOU was not authorized to carry on such market activities.

For the protection of investors, the AMF stressed that it was imperative that the BDRVM issue this decision without a prior hearing since IOU continued to operate its website.
The Autorité des marchés financiers (AMF) is the regulatory and oversight body for Québec’s financial sector.

– 30 –

Information:
Media only: Frédéric Alberro 514-940-2176
Information Centre
Québec City: 418-525-0337 Montréal: 514-395-0337
Toll-free: 1-877-525-0337
www.lautorite.qc.ca

So it looks like the issue is an alleged contravention of the Securities Act.

A bump in the social lending road?

A few weeks ago, Canada's first person-to-person lending platform community opened its doors with the launch of IOU Central. At the time, there was some discussion about which regulatory bodies would oversee this industry in Canada. The position taken by IOU Central was that there were essentially no watchdogs, and they based their operation on the Prosper model.

Well, it seems that Canadian P2P lending may have some watchdogs after all. According to IOU Central's website, they are currently operating with "limited functionality" while they "resolve a regulatory matter". During this downtime, users can not post new loans, nor can they place bids on loans. The only activity is the repayment and servicing of funded loans under the borrower and lender agreements.

This is an interesting turn of events, as IOU Central seemed to come out of nowhere, while the CommunityLend project has been working on regulatory and technical requirements for ages. The difference, of course, is that CommunityLend seems to be aiming to have its ducks in a row before launch, rather than going off half-cocked. It's possible that IOU Central's "regulatory matter" is actually very minor, and they'll be up and running again soon, but it looks to me as if they rushed to market, and are now paying the price for their lack of preparation.

Person-To-Person Lending: not just for Americans anymore...

I've read a fair bit online about Prosper, the popular American person-to-person lending community, and I've been wondering when we would see this sort of thing in Canada. For months, I've been checking in on the CommunityLend project, which looks promising, but has yet to provide any concrete launch plans.

This week, Canada got its first person-to-person lending platform, with the launch of IOU Central. Like Prosper, IOU Central allows users to lend or borrow funds. Users can request a loan of $1,000-$25,000, or bid on loans in increments of $25-$25,000. As I understand it, 40 users could bid $50 each to fund a $2,000 loan, or a single user could fund the entire loan. The ability to diversify across multiple loans provides a nice protection against default.

An interesting point is that, although IOU Central is not insured by CDIC, they keep member deposits at a CDIC-insured bank, effectively providing "CDIC pass through insurance". This is similar to the indirect FDIC insurance enjoyed by PayPal members. My first thought on reading this was, "Holy smoke, they insure the loans!" However, I soon realized that it's only your unlent deposits that are insured; once you've funded a loan, you're at the mercy of the borrower.

This service is brand new, so I'm a long way from actually trying it out. However, I'll be very interested to see what kind of reaction this gets, and what happens when CommunityLend finally comes on the scene.

Finally checking my credit reports

Well, I've written before about the options for Canadians to obtain a copy of their credit report, and I decided to put my money where my mouth is, and request my own report.

Some quick research online revealed that both Equifax and TransUnion offer the option to request the report by phone. Here are the numbers to call:

• Equifax: 1-800-465-7166


• TransUnion: 1-800-663-9980

I've called each of these numbers, and as of today, they do indeed allow you to request your report by phone.

Here's the catch (at least for me): neither of these agencies has my current address on file, so I need to send the old-school paper request to obtain my report. Equifax at least lets you fax the request (514-355-8502), but TransUnion only accepts paper requests by mail. It looks like Northern Credit Bureaus allows you to fax your request as well (1-800-646-5876).

I'm glad that I decided to check my report, because now at least I know my address is out-of-date. The fact that any of my information is inaccurate has been an eye-opener to be more vigilant with checking my credit. I think I'll start doing a review once per year.

Let's see how the rest of the report stacks up.

Credit as a relationship

The Financial Blogger has a very interesting and creative couple of posts on viewing credit as a relationship. The first post draws parallels between applying for credit and wooing a potential mate, and the second equates credit problems with the relationship going sour.

This is a very interesting (and important) way of looking at your relationship with a lender. The posts repeatedly underline the fact that credit is all about trust. Banks are willing to loan you money only if they believe that you will pay them back. The cynical (or realistic?) among us might amend that to say that banks are willing to loan you money only if they believe that you will continue to make the minimum payment indefinitely, but it all comes to the same thing. Your lender is trusting you to make payments according to your contract with them. Without this trust, they will not lend you the money.

Too often, I think people overlook this trust aspect of a credit relationship. It's all too easy to complain about our credit card payments, and resent the money the bank is charging us, but the fact remains that we did borrow this money, and we did promise to pay it back.

I'm currently married to a considerable amount of consumer debt. In the context of this relationship, I guess you could say I'm working to "put the kids through school". Once they're out of the house, I hope to end this relationship amicably. I hope my bank will understand, and I'm sure Ms. Loonie will be happy to have me back as a one-woman man.

A new credit report to check?

Today in the RedFlagDeals.com forums, I found a link to the Financial Consumer Agency of Canada website. This site has a number of useful interactive tools, including quizzes on credit reports and scores, credit cards and mortgages. There is also a mortgage calculator, and a "Cost Of Banking Guide" to help select the bank account that's right for you.

One interesting piece of information I found here is a link to a Canadian credit reporting agency that I didn't even know existed. Apparently the three credit agencies in Canada are Equifax, TransUnion, and Northern Credit Bureaus. As with Equifax and TransUnion, Northern Credit Bureaus provides a free copy of your credit report delivered by mail. The FCAC recommends obtaining a credit report from all three agencies at least once a year.

I've updated the "Free credit report" post linked in the sidebar to reflect this new information.

Free credit reports in Canada

Taking steps to prevent identity theft is an important part of personal finance. Tricia from Blogging Away Debt has put together a great list of tips on protecting your identity. A lot of these focus on physical management of personal information, but she also provides the crucial "check your credit report" advice. Tricia links to the American "AnnualCreditReport.com" site (which is only available to American ISPs), and I thought I would take a minute to gather the equivalent links for Canadian consumers.

Canadians can obtain credit reports from either Equifax or TransUnion. Although both of these agencies provide free credit reports to consumers, this option tends to be hidden behind the numerous fee-based options they provide. Basically, you're paying a fee in order to request and receive the report online; the free report must be requested and delivered via snail mail. Here are links to request a report from the two agencies:

Equifax
Credit report options
Free credit report request form (PDF)

TransUnion
Credit report options
Free credit report request form (PDF)

Note that neither agency provides the actual credit score as part of the free report. Equifax provides the score as part of their "deluxe" credit report package, for $23.95.

** UPDATE **

There's a third reporting agency in Canada:

Northern Credit Bureaus
Credit report options
Free credit report request forms (print and fill out IDENTITY and DECLARATION forms)

*** UPDATE ***

Experian Canada now offers credit reports directly:
Credit report options
Free credit report request form

**** UPDATE ****

Experian Canada is ceasing operations after April 17, 2009. From their website:

Effective April 17, 2009, Experian will unfortunately discontinue its Canadian consumer credit bureau operations as a result of the very difficult economic environment in Canada and around the world, which Experian believes will persist for some time. This means that as of April 18, 2009, Experian will no longer be providing credit reports out of its Canadian database regarding any consumer in Canada.

We will continue to respond to ongoing consumer requests for copies of credit reports, as well as handle disputed items and other consumer assistance until April 17. After that date and upon completion of any disputes in process, all consumer information will be deleted from our database and will no longer be available to consumers or creditors.

If you have not previously obtained your credit report from us or initiated a dispute on your Experian credit report, you may wish to contact one of the other credit bureaus for assistance.