Irish Financial Review

Educating college students on their personal credit profile

It’s nearly there!
Finally, the long-awaited Central Credit Register is about to take another step forward as the primary source of credit and credit repayment information across the State.
For those of you that may not be fully familiar, the Central Credit Register is the new credit reporting database that was set up following the Irish bailout and intervention here by the so-called Troika (The EU Commission, European Central Bank and IMF). It essentially was designed to replace (and duplicate) the work of the Irish Credit Bureau, the only other consumer credit reporting database in the land. For the Troika, the ICB was unacceptable as the sole provider of credit data since it was owned by the credit providers (banks, credit unions etc).
The CCR is being managed by Italy based Crif, who up to now have been a junior partner of sorts in the data management of the ICB, where it provided credit scores to Irish banks. Credit scores have become the linchpin of modern credit analysis for lenders, employers, landlords, car insurance and even hospitals through the delivery of a simplified, condensed 3-digit summary code of how we all manage credit. In Ireland, the CCR says it has no plans to provide credit scores, but it doesn’t need to; other firms can! Companies like Crif and Fair Isaacs (FICO) are world leaders in this space. They can take all available credit data and condense it down to that 3-digit summary of how people pay their bills and if they have made recent loan enquiries or even, if there have been changes in the way they repay their loans.
Beginning September 30th:
  • All lenders considering consumer loan applications of €2000 or more will be obliged to enquire on the Central Credit Register for a credit report.
  • Credit reports are available free of charge for consumers.
  • Credit reports include information on credit cards, mortgages and overdrafts and personal loans since 30 June 2017.

 

Central Bank of Ireland

All lenders considering loan applications of €2000 or more will be obliged to enquire on the Central Credit Register for a borrower’s credit report. In addition lenders may obtain credit reports if borrowers seek to restructure a loan, are in arrears on any loan repayments, or are seeking a loan under €2,000.

Lenders have been submitting information on credit cards, mortgages overdrafts and personal loans to the Central Credit Register monthly since 30 June 2017. Credit reports are available free of charge for consumers (subject to fair usage), and will contain information on these types of loans.

Moneylenders and local authorities have been able to submit information to the Central Credit Register since March 2018 and may also now make enquiries. Information on hire purchase and Personal Contract Plans (PCPs) will be included once legislation has been amended.

The Central Bank is committed to serving the public interest by safeguarding monetary and financial stability and working to ensure that the financial system serves the needs of the economy and its customers over the long term. The Central Bank uses the Register to get better insights into the overall level and patterns of lending in the economy.

Information on lending to businesses has been submitted to the CCR since 30 March 2018. Business loans will be included on credit reports once data quality can be assured.

National Education Programme

MoneyWhizz, the financial literacy initiative based here in Ireland is teaming up with leading 3rd level institutions on the significance of developing and maintaining a positive personal credit profile. A series of talks and guides have been prepared to educate them on the growing importance of their personal credit profile

Lessons include:

  1. What personal credit reports are
  2. The data they collect
  3. The time period credit data is maintained
  4. The difference between a credit report, credit profile and credit score
  5. Ways and means of protecting a personal credit profile
  6. How credit data can be used and applied in Ireland and beyond (USA, EU, UK, Canada, Australia).

For further details, please visit www.moneywhizz.org

 

Not understanding PCP deals is just the beginning

A report carried in the Irish media today shows that Irish consumers don’t really understand PCP contracts. That is just the beginning!

Irish consumers also don’t understand:

  • Mortgages
  • Cost of credit
  • Investing
  • Pensions
  • Personal credit reports
  • The list goes on and on!

When it comes to money in general, Irish consumers score poorly across a broad range of measures when compared to many other European countries; PCP contracts are just the tip of the iceberg!

Irish consumers are particularly bad at asking questions in respect to money. For example, on areas of retirement planning, most fail to challenge investment advisers when it comes to the use of language, investment options, rates of return as well as  fees and charges. Separately, on everyday purchases using credit cards, many do not understand the enormous cost of using the minimum payment which can double the cost of purchases.

Financial confusion

Broadly, the core issue comes down to financial confidence; Irish consumers simply lack it in buckets. And who could blame them? At a recent pensions and investment seminar, the language used by the speakers was foreign, cryptic and confusing. Financial terminology that should be confined to the back-room of product development was used as a form of assault-and-disarm tactic:  PRSA, AVC, ARF, AMRF, BOB, the list went on and on. By the end of the 45-minute talk, the bobbing heads of the audience was more an expression of terminology numbness, not understanding and agreement.

Starting early

Financial education is key to preparing all citizens for a life with money. At its core must be language that is simple. For example, instead of using cryptic terminology to explain say pensions, a more engaging alternative would be to begin by explaining them as long-term savings and building on the complexity of choices available. This is how I approach the topic and it always works.

Financial confidence

Financial education also offers an opportunity to develop financial confidence, that is the willingness of people to challenge those that may deliberately or otherwise be inclined to over-rely on cryptic financial terminology…and this is the key to greater consumer understanding of setting and achieving their own financial goals and managing their money more effectively.

Frank Conway is a Qualified Financial Adviser and founder of MoneyWhizz.org, the financial education group. 

If inflation picks up, what is the impact on your retirement plans?

Inflation is defined as a general increase in prices and a decrease in purchasing power.

Factoring for inflation is key to retirement planning

For anyone nearing retirement, the threat of inflation presents a nightmarish scenario; fixed income being eroded in purchasing power value.

A majority of financial advisers across Ireland approach retirement from a financial accumulation perspective but not enough focus is placed on the devastating impact of inflation. And while inflation has been extremely muted in recent decades, it is something that always lurks in the shadows. To some degree, we all benefit from inflation as it represents a functioning economy; the European Central Bank targets inflation of about 2% as its key measure.

Across the world, especially in developed countries, inflation is an economic weapon that could be deployed to create a financial escape hatch for municipal authorities trapped by unattainable pension obligations. Without it, they will be forced to raise taxes, redirect funds from current spending or default in the years and decades ahead.

But back here to Ireland, what if inflation did tick upwards and become a more prominent feature of our day-to-day lives.

The decreasing value of today’s money in the future

Let’s say you have €40,000 on deposit with a bank or credit union today. You leave it on deposit because you cannot get a mortgage to purchase an investment property and you don’t fully understand stock-markets, bonds, mutual funds or alternative investments or the risk they carry. It takes a lot of working hours to accumulate €40,000 from net income. So, deposits are cash, cash is king and you can get it when you need it. Or that is what you tell yourself. But in reality, cash in this case is a leaking ship that is sinking in value. Here’s why.

Let’s say for a moment that inflation is running at 2.5%. This means the value of your money is eroding at 2.5% per year. So, in the first year you have that €40,000 on deposit, you lose €1,000 of it through inflation. If you had taken that €1,000 and burned it, you would see that loss immediately but because inflation is a silent killer of the value of money, you don’t notice it. It’s like natural gas; we can’t smell it or see it but it has a devastating impact all the same.

Each year, that pot of money falls in today’s value.

If we consider the value of the money over a 20-year period, the loss continues and the purchasing power value of that €40,000 in today’s terms continues to fall each year.

The value of €40,000 in today’s terms will fall to just €24,410 in 20 years time if inflation remains at 2.5%. In other words, in 20 years time, that money will only buy you what €24,410 would buy you today. It would be the equivalent of walking into a shop today, handing over €40,000 to purchase €24,410 worth of goods and receiving no change.

Inflation is a corrosive force on the value of money and it is what every money manager worth their keep should be striving to counter if they really do put the financial wellbeing of their clients first.

If inflation rises to 3%, what happens then?

Using that same €40,000 example, if inflation were to rise to 3%, the value of today’s money falls to just €22,147 or in percentage terms, it decreases by 45%. In other words, the value of the money decreases by almost half.

OK, but how much will you need in the future?

This should be a major concern for anyone remotely considering their future financial needs.

If we take someone today that requires an annual income of €40,000 to live, to have a home, pay for day-to-day living costs, in order to enjoy the same standard of living in 20 years time, assuming for inflation at 2.5%, they will need €65,544.

For someone still in employment, that might be achievable through wage inflation. However, for anyone in retirement, on a fixed income, even if they are financially comfortable today, they face the real prospect of a fall in living standards. Don’t be fooled by those that might argue that mortgages will be repaid and kids will have all flown the nest and become financially independent. In reality, other life factors come into play; health is a major one.

What if inflation is greater than projected, how much will be needed?

If inflation rises to 3%, that €40,000 you need today grows to €72,244 in 20 year’s time.  If you need €50,000 today, at 3% inflation, you will need €90,305. The numbers only go one way, up!

Future proofing

The future will always present risk. Some of it can be mitigated through financial planning. For example, the biggest financial risk in retirement comes with the cost of medical care, one can have medical insurance but there will be out-of-pocket expenses which can add up and drain a fixed income depending on the medical condition. Across the world, authorities are recognising the impact rising healthcare costs are having on public and private services. A major factor in those costs derive from lifestyle health issues, including obesity, diabetes, high blood pressure and heart disease; health issues that are easy to manage and control through diet and exercise.

For those seeking a relatively comfortable life in retirement, they need to consider what they can plan for. When it comes to their financial needs, they must factor for inflation and at current returns, placing money on deposit will not keep pace with modest levels of inflation; investing can, provided it is managed efficiently. They should also bring their long-term health situation into their plans and look for ways of limiting a potential financial black hole.

Frank Conway is a Qualified Financial Adviser and Founder of MoneyWhizz.org

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