May 27

Yesterday, Finance Minister Jim Flaherty introduced a number of new measures aimed at reigning in credit card practices. Here is a rough rule of thumb: If the credit card industry and the NDP are both unhappy, the regulations strike the perfect balance.

Yes, the credit card industry is complaining that their world will end, while Jack Layton claims the Finance Minister has capitulated to the bank. No, we will not need to have a wake for card issuers, they’ll continue do just fine. And a cap on interest rates won’t, shouldn’t, and can’t happen. Just like there won’t be caps on our incomes, that no car can sell for more than $20,000, or that retailers can only sell their products at a certain maximum markup.

What the Finance Departments’ regulations do address are four major areas which will benefit all card holders in measurable ways:

1) There will be a mandatory 21 day grace period of no interest on new charges. “Credit card inflation” has seen grace periods shrink from up to 26 days down to as low as 15 over the past few years. After all, the shorter the free ride, the more profitable each account becomes.

But the new regulation goes much further: Every card will now have this grace period, even if the account had a balance the previous month. What more than three-quarters of people don’t realize is that they never did have any grace period if they did not have a zero balance the previous month! Years ago, card issuers took that free ride away. It was “use it or lose it,” and even if the balance forward was one penny – all new charges were subject to interest immediately.

2) Credit card statements will now include a warning line that will show the length of time it will take to pay the balance in full, if making only minimum payments. And that will be a rude awakening for most people, and hopefully an incentive to step up their repayment plan.

3) Payments will now be allocated to balances in favour of card holders. Up until now, any payments were always applied to the lowest interest rate portion first. So, someone with part of a balance on a cool 1.9% rate, and a portion at 19.9%, could pay as much as possible, but not one dime would go towards the high rate portion of the balance. The new regulation now forces card issuers to apply any payments first to the higher rate balances.

4) You control your credit limit. The main goal of card issuers is to have us owing the largest amount of money and to pay the smallest payment possible. THAT is how they maximize their profit. To help their customers with this “going broke” project, limits keep increasing. After all, when the balance gets to be more than two or three months’ worth of income, there isn’t a chance someone can pay off the balance. Great for them – bad for the customer.
The new regulation requires card holders to explicitly consent to a limit increase. While a smaller limit does impact someone’s credit score, let’s be honest: If we claim we don’t let our credit card balances get beyond reasonable, why do we really need a limit of $10,000 or more?

In all these four areas, Finance Minister Flaherty found an appropriate balance of fairness to card issuers and us card holders. In fact, all four of the main regulations go beyond what the U.S. Government was recently able to pass in their “Credit Card Holder Bill of Rights.”

However, the most powerful impact Minister Flaherty can make is yet to come in the formation of the Finance Departments’ Financial Literacy Task Force, announced in the last budget. Why? Because I would bet that the vast majority of people reading the four changes will go: “I didn’t know that.” And THAT is precisely where the focus and efforts should be directed: towards financial literacy, starting in the school system where more than 85% of teenagers have never taken a course on finance or credit.

May 20

In January we talked about GM and Chrysler, and the possibility of bankruptcy. Right now, it’s one down and one to go, as I believe a GM bankruptcy is probably just weeks away. GM is working on a June 1st deadline to eliminate $27 billion of bondholder debt and come up with a new labour agreement or they’ll be pushed into bankruptcy.

For six months now, there’s been a cry that we can’t let them go bankrupt, because it would lose a gazillion jobs and end car manufacturing. I said then, and it’s obviously true, that the fear tactics were and are nonsense. Major changes were going to happen – with our without a bankruptcy.

Even GM has started to terminate dealers, shutting down production for months at a time, and laying off people. That has nothing to do with the possibility of bankruptcy. It has everything to do with a business model that’s not working! When the foundation of your house is collapsing is not the time to put in new windows, or paint the deck.

GM wants to close one out of every six dealers in the U.S., and get from 6,000 down to 3,600 by the end of next year. In Canada, the plan is to go from 700 down to 300. They call it a dealer rationalization plan, and the termination letters are expected to go out the end of this month.
If you do have the cash to buy a new vehicle, it is critical that you hold off on your purchase for another month or so. If not, you may be losing out on a huge amount of money.

Right now, the U.S. House of Representatives has passed a junker rebate program, and it is now in the Senate for consideration. The program is designed to get old junkers off the road and supply a rebate of up to $4,500 towards a new vehicle purchase that is more fuel efficient.

If the trend of Canada matching U.S. programs holds true, buying right now would cost you a 20 to 30% first year depreciation, and you’d miss out on that huge rebate of up to $4,500.
The U.S. government claims this is to promote fuel efficiency. Don’t believe that – it’s purely to boost car sales. For anyone trading a pickup, they only need to buy something that gets two more miles to the gallon to qualify for the maximum $4,500 rebate. Even Hummers just need to be traded for something that gets five miles per gallon more. That’s not fuel efficiency – that’s a sales promotion.

If you’re in the market for a new vehicle:
• Hold off until this program is in place or there is a clear decision that Canada won’t match it.
• Pay cash for your new vehicle, or better yet, buy a one or two year old that has some warranty left to avoid the new car depreciation
• If you’re going to ignore the “pay cash” advice, never finance a vehicle for more than four years.
• Never ever make the buying and financing decision on the same day. You’ll need to know the rebate that’s available and compare it to the low-rate finance offer. More times than not, you’ll be better off, financially, taking the cash rebate off the price and financing it with the credit union.

Hold off, too, if you’re considering a one or two year old model right now. When the new program becomes available, it not only drops the price of new vehicles, it also drops the value of one and two year old models about the same amount!