Your Money Book

Boy, did we Canadians go on a debt binge last year. Our total consumer debt, excluding mortgages, reached $1.4 trillion at the end of 2009. We are now officially the most overextended country of the big 20 developed nations. For all the pain we see from US families, we now owe more than Americans, on a per capita basis, and even more than the average Greek family! Right now, we are in debt $1.44 for every dollar of income. If there were to be a setback in the economy again, we’d be in big trouble.

Or, as we talked about a month or so ago, when rates keep climbing, we’re in the same trouble. Don’t forget, consumer debt, other than probably our fixed-rate car loans, most everything else from lines of credit to credit cards are on variable rates. That means, rates go up, you’re paying that increase the following month.

Yesterday, the Bank of Canada raised interest rates another quarter of a percent for the second time. On each $100,000 of debt that is not on a fixed rate, these two rate increases will cost you $500 a year and rising.

Behind the scenes, the federal government is taking steps to clamp down on our debt loads. A few months ago, the Federal Finance Minister announced changes to the down payments for mortgages, and the total that can be refinanced on a home.

The next wave of pressure, and nobody has talked about this, yet, is your credit cards. Starting in a few months, your minimum payment will be going up. The good news: you’ll have it paid off faster. The bad news: It’ll hit your budget to pay more as a minimum payment.

Starting with MBNA, the largest issuer of MasterCards in Canada, August will see a new and higher minimum payment. They will be the first, but not the only ones, to change the way the payment is calculated.

Why? Remember that I always say what happens in the US will come here? Well, their new credit card regulations require a box on your statement to show how long it would take to pay off the balance when making minimum payments. That will happen in Canada this fall, too. So when they increase your payment, the staggering time it’ll take to pay it in full won’t look quite so ugly when you see it in a few months.

The third reason, and it’s a big one, is that our debt load has started to increase the arrears and write offs that card issuers are having. So if they increase your payment, they get paid back faster, and have less risk. But we can also start to look for limits to be cut back for a ton of people in the next wave of clam downs. In the US, $1.5 trillion has been cut from credit limits and they’re not done yet.

I would bet that the two fastest changing industries are probably the medical field and the world of finance and credit. What was true one month gets changed, amended, legislated, or moved around, in one way or another.

Over the last couple of days I came across a number of things that are brand new, and that we all need to know:

-Scotiabank has changed their credit card agreement. That means others have, or will, follow soon. Starting in September, if you miss, or are late, on three payments in any 12 month period, your rate will go through the roof. The statement I saw jumps it by 7%.

-The two-tier interest rate charges started in the U.S. and is now here. Along with that, you will no longer receive credit limit increases automatically. You will now actually have to OK them. And that’s a good thing. Almost none of us NEED a bigger limit. The card issuers will send you the limit offer and you can accept or decline. Of course, you can still contact them to request one, if you need to.

-Scam phone calls are something that happens to millions of people. But you can no longer rely on call display for the accuracy of the number popping up. With internet calling, fraudsters can now spoof phone numbers being displayed to read almost anything they choose. You THINK you’re getting a call from your bank, because that’s what it reads on the call display, but it’s not. Always, always, get their name and department, hang up, and call the number on the back of your credit or debit card. It is the ONLY way you know you are actually reaching your bank.

Millions of us deal with Shaw, as do I. But I found out two days ago how nasty they get with one month past due. My company pays the bill, but there wasn’t a statement in April. May got paid, June got paid, July got paid, but it was always dragging by a month. My fault – no doubt. But they simply went in to disconnect my internet one morning.

All companies love you when you pay – and I’ve paid them close to $30,000 over the years, but don’t care when there’s a slight problem – no matter what the reason. Media relations chose not to respond to my inquiry, but their computers can only tell I’ve dealt with them since September 2008, instead of April 1995. Whether it’s Shaw, your bank, or your mortgage company – they’re ruthless on any past due amount, no matter what the reason, track record, etc. So, as the kids say: Don’t go there.

One of the most convenient, but so financially deadly, traps is to have overdraft protection on your chequing account. It allows you to go below zero without fees, or the chance of bouncing a cheque, but comes at a very high price – in a number of ways.

Firstly, an overdraft will almost certainly become a permanent debt, because it now pretends you can go to minus $500 or minus $1,000 – forever. But it’s not something most people really consider “debt.” And it also gets used almost every month, because we never seem to get out of it, kind of like quicksand.

The convenience comes at a high price of around 20% interest. That is one of the biggest reasons banks aggressively sell it. Yes, it does protect you from an NSF charge, but can’t you simply learn that zero in your account is the end of spending, instead of going in the hole over and over again?

About six months ago, I started working with someone, OK, more like bugging him, to get his $1,000 overdraft cut off. But it was, and will be for you, very hard to get yourself out of that hole. A great plan, if you finally want away from this almost permanent debt, is to do it in stages. The plan was to get it down to below $500 and then go to the bank and cut the limit of the overdraft to $500 as well.

That was a great way to assure the overdraft was being reduced and not going up again. Yes, the teller will claim they cannot do that, you have to see a loans officer, etc. That’s nonsense. It’s one press of the button to reduce it. The reason they want you to see a loans officer is because they want to SELL you on keeping it way up there. That’s how they make money! Their job is not to help you, but to help their financial statement. If you get that push back, tell them: Fine – just close the account then. At that point, they’ll blink and cut the overdraft down. It’s YOUR money and you are the customer. It’s what YOU want and not what the bank wants!

US household debt to disposable income is still at 122% as of April. In normal times of the economy and employment levels, anything past 100% isn’t sustainable over an extended period of time. That is, you cannot continuously spend more than you earn. It is a recipe for financial trouble in the long term, and obviously means we can’t save. In Canada, even through the recession, we Canadians kept spending. Our household debt is now 146% of disposable income. We may be more conservative than Americans, we may have lower total debt levels but we’re spending a lot more, over and above what we earn, than our American friends.

On that same issue, the Bank of Canada says that, by 2012, one in 10 households will be spending 40% or more of their household income just paying debt. What does that leave to live on? Already 32% of households have no savings. So it stands to reason that, the more we pay towards our debts, the less money we have to live on, or save.

The National Foundation of Credit Counseling just released a study that, last year, the average person had over $2,000 in unexpected expenses! I keep talking about how critical it is that all of us have a basic emergency fund with two weeks of pay set aside – that’s another reason why. We all know there WILL be an emergency. We just don’t know when, what, or how big it’ll be. What an emergency fund does is to turn a panic and crisis into a minor inconvenience, because we have the money! If not, here we go again…using credit, and thinking that’s a solution, and going further in debt once again. Find a way to have two weeks worth of your pay in an emergency account that you don’t touch for anything else.

According to a company called RealtyTrac, foreclosures in the US, in the first quarter of 2010, are UP 35% over the same time period of 2009. And the credit bureau, Trans Union, found that mortgage arrears are rising, and not falling. In Nevada, 16% of homeowners are in arrears, it’s 15% in Florida, and 11% in Arizona and California.

In Canada, according to a report by the Canadian Association of Accredited Mortgage Professionals, there are about 375,000 people with mortgages who are challenged by their current payments. I don’t know what their definition of challenged means, but it sounds like a problem. If rates increase by just one percent, they expect another half million people could be in trouble. That goes back to what we talked about in the security of a fixed rate, instead of a variable rate mortgage.

On the flight back home yesterday, I read another sick, sad and totally unnecessary story of a family losing their home. But this one is different. A young family had a mortgage on their home and had mortgage life insurance. When the husband died during a traffic accident, financially, the wife and her son should have been OK. But that was not the case, simply because there’s mortgage life insurance in place.

Yes, there is a difference in insurance coverage for our debts. But it’s something most of us would rather not think about. When we do have to deal with it, in the event of a death or serious illness, it will always, always be too late.

One of the big debts most of us choose to insure is our mortgage. But it should never ever be mortgage life insurance.

That type of coverage is convenient, because we just sign up at our mortgage lender, but that coverage only pays off the balance of your mortgage. Essentially, it protects the lender so they get paid, it does not protect the family by giving them any financial freedom, or breathing room with other bills. It’ll give your family a free and clear home, but what good does that do when they have to sell the house right away to raise money for other bills, debts or financial needs?

A much less expensive, and way more flexible policy, is to get an equal amount of term insurance. It’s also for a fixed period of time but now lets your family decide what to do with the money and not the lender. The money is paid to your family. Sure they might pay off the mortgage, but that should be their choice not that of the lender.

What happened to this family in Illinois is that their home was paid off, but they were now forced to sell it to have any money at all to live on. You can bet that was not what the plan was when they paid the overpriced premiums for all those years, thinking they were protected.

Another common insurance for loans is optional accident and sickness insurance. Yes, it’s ALWAYS optional. If you were told different, you were lied to – simple as that.

Most of these policies have a 90-day elimination period. Elimination means it starts on day 91 – long after most short-term accidents or illnesses are over. This puts you three months behind on your payments and will not pay out a dime. But they are the least expensive, since they don’t cover the first three months at all.

Something called a retro policy means the coverage is retroactive to the first day you were off work. There is a big difference. The time to discover it is NOT when you have no income and no chance of making a claim.

As with anything else, ask the questions, get informed, and get the “what if” answered before signing on the bottom line.

J.D. Power Fall 2009 Credit Card Satisfaction Survey

Each fall J.D. Powers conducts a very comprehensive credit card survey. It rates overall satisfaction, along with how happy cardholders are with their rewards, payment processing, problem resolution, customer service, and fees.

This year, American Express rated five stars, head and shoulders above other national card issuers in all categories. At the bottom of the bottom, with the worst score on customer’s satisfaction with their credit cards were Capital One, along with GE Money. GE is a surprise, as they handle the Wal Mart cards, and Wal Mart prides itself on great customer service! As to Capital One – what’s in your wallet? I hope it’s not one of their cards!

But the scary response to the survey was that 53% of us did not know the interest rate on their card, even though it is printed on every statement. Not knowing that we are paying around 20% on our credit cards is not good news!

Scotiabank can’t be happy with a bunch of national press recently. But there’s a great lesson for anyone over age 59 to learn! All banks offer seniors a no charge service banking packages, or greatly reduced service charges at various ages, but for most it’s at age 59. Barry Ashpole, a 66-year old college teacher, had the TD and Royal automatically lower his fees, because all the banks have your birth date on file. But Scotia kept charging him the full service charges for seven more years! When he discovered the huge overcharges, he hit a wall of no help to get this reversed, and fought it all the way to their Ombudsman’s office. At that point, he received a six month refund of $71. They wouldn’t refund the other six and a half years! You need to make sure you know when you are entitled to a break of the huge service charges, or you’ll get taken, as Barry Ashpole found out the VERY expensive way.

And a final update on your credit cards: Time and time again, I point out how critical it is to check your credit card statement line by line. Stuff shows up that’s not yours, merchants who accidentally, or because of a kinky staff member, charge things twice, and all kinds of errors can and do happen. But less than 10% of us look at our statement items – and that number is way lower if you get your statement on-line!

There is a phrase you need to know. It’s called post transactional marketing. You buy something from a retailer on-line, or join a web site. Often you’ll get a pop-up asking you to join a loyalty program for deals, alerts, or whatever. Be careful, because in many instances, these pages look like they come from the retailer, but they’re third parties, and deeply buried in the fine print is a note that you’re actually going to have a monthly fee charged to your credit card! And it’s not small business, but the 1-800 Flowers, Barnes & Noble, airlines, Priceline and buy.com sites!

Be careful, as these marketers have scammed people out of over $1.5 billion so far, Facebook has now been hit with a class action lawsuit, alleging that they allow, promote, or profit from these post transactional marketing, and the U.S. Congress is holding hearings on the issue.

Today, here are two moral dilemma stories. What do you think? Are either, or both of these, right, or wrong?

A number of years ago, in Michigan, some dealers experimented with a system that had a computer chip installed in vehicles which were financed. If the payments were past due, the owner would get a warning from this electronic signal in the car. It warned that the vehicle would become inoperable if the payment was not made within three days. Another warning came through the car the following day. Then, on day three, the car’s electronic system was automatically shut down, and wouldn’t start. Talk about a way to get someone’s attention to make their payment!

The dealerships were able to finance the vehicles with this software for a lower interest rate, because the risk of arrears was much lower on these loans. It resulted in a lot less repossessions, but the backlash was so huge, the technology didn’t take off to any large degree. Very bad idea, or would you buy it with the mindset that it’s reasonable not to drive something you can’t afford to pay?

Last year, in the U.S., between 700,000 and one million people walked away from their homes – but not in a typical foreclosure.

Strategic defaults are foreclosures of homes were the mortgage holder HAS the money, and HAS the ability to pay, but chooses not to. These people owe more on their home than the value, and make a conscious decision to stop making the payments. It will give them six months or so free housing until the bank comes to foreclose. At that point they walk away, reasoning, they’re saving themselves tens or hundreds of thousands of dollars paying a debt that is way more than their home is worth. They literally trash their credit, but reason that they are still way ahead, financially, by now being able to walk away from their home. In many interviews, on various programs, a lot of these homeowners were asked if they didn’t feel guilty, or some moral obligation to pay the mortgage that they CAN pay and voluntarily signed. The answer has always been no.

If you have the financial ability to pay, would you walk away if you owed $10,000 more than your home was worth? What about $50,000? What about when the value of your home has dropped by 50% or more such as many places in Arizona, Florida, or California have experienced?

Before you answer that, you should know something else. The biggest apartment complex in the world is Stuyvesant Village in New York. We’re talking 11,000 apartments and 18 highrises. In January, they defaulted on a $4.4 billion mortgage and voluntarily walked away. And who was one of the big five investors? The Church of England.

Identity theft is one of the fastest growing crimes in the country. It is really nasty, very time consuming to deal with, a LOT of hassle, and it is only going to continue to grow for years to come. Almost everything law enforcement can do is after the fact, and that puts the onus on us to protect ourselves.

One of my biggest pet peeves is people on their cell phones in public. More so, when they have a loud voice, and really seem to want the whole world to hear their conversations. I’m sharing that for a reason, because two weeks ago, I was in the business class lounge at the Denver airport, looking for an hour of peace and quiet. Unfortunately, it turned out I was stuck three seats down from a man named Walter, and Walter was on a mission. He was on the worlds’ longest phone call to Wells Fargo attempting to get the interest income on one of his wife’s accounts for his tax return.

It was obvious from the one side of the conversation that Walter was not having much luck. Gee, like he couldn’t have guessed that privacy laws don’t give him access to other people’s financial information.! But, undeterred, Walter barged ahead.

The first thing he shared, in his rather loud voice, was his social security number and date of birth. That was just the beginning with what the customer service rep was obviously asking him, in order to establish his identity. That was followed by his Wells Fargo credit card number and security code. Becoming more frustrated that he wasn’t getting anywhere, the next thing Walter volunteered was his personal account number and transit number where his main investments were held.

By now, anyone who was interested in Walter had more than enough information to steal his identity, and over $50,000 out of his accounts, based on what a frustrated Walter shared during his call. To my way of thinking, it was not only rude, but totally irresponsible! But think about how much of your information is so easily accessible while you’re having a chuckle about Walter’s stupidity. From your Facebook privacy settings, to not having virus software when you do your on-line banking, or simply throwing mail with all kinds of personal information in the garbage, it’s you that has to be pro-active.

You cannot simply pay $10 to $20 a month to someone and hope everything will be OK. Hope is the worst form of identity theft protection. Unfortunately, nine out of every ten companies that promise to protect you do no such thing. Based on our population, around four percent of us will fall victim to identity theft in a year. As a result, these companies who promise to protect you are playing a numbers game. They receive huge amounts of money each month in premiums, and have to pay out only about four percent – if anything at all! In the meantime, millions of people are paying monthly premiums, thinking and hoping that they’re protected.

The basic, simple, easy, and common sense things you have to do:

-Don’t keep your entire life in your wallet or purse. You do not need to have access to 10 credit cards, your social insurance number, and a bunch of other personal stuff that identity thieves would love to have.
-Get a shredder and use it. Do not put personal papers or credit card mailings directly into your recycling or garbage.
-Always, always check your credit card and bank statements for something strange or unauthorized. You only have 60 days to challenge something or you own it, and have to pay it.
-If you have had your identity stolen, your first stop is the police station. I don’t care if it was a relative or stranger. You have to protect yourself and that starts with filing a report or creditors tend not to believe you – and rightly so.

The three big financial stories of the last week are all inter-connected, and do affect us all, directly or indirectly:

Last week, the U.S. Security and Exchange Commission charged the investment giant Goldman Sachs, with civil fraud. They are alleging, and it’s only that, until proven in court, that they defrauded investors out of over a billion dollars in selling mortgage backed securities. In the U.S., those are the mortgage packages sold all over the world, and probably in your mutual funds or pension plan, too. Yet, at the same time as they were selling and promoting these, Goldman Sachs was also betting that they would default sooner or later. At yesterday’s hearings in the Senate, there were a bunch of internal e-mails released where their big cheeses actually described these mortgage packages (so call collateralized debt obligations) as crap. Nice they were selling them to investors all over the world, while that’s what they thought of them. Stay tuned, there’s lots more to unfold here.

Yesterday also brought the official word that rating agencies have downgraded the debt that the Government of Greece owes to junk status. In other words, they’ve decided it’s the highest risk debt there is. It’s another lesson for you, me, and governments everywhere, especially in some European countries, that borrowing only works for so long. Greece has a lot of social programs, a very bloated civil service, and debt as far as they eye can see. What the government doesn’t want to do is to increase taxes, increase sales taxes, or to start making drastic cuts to government spending. It looks like now they will be forced to. Until they do, the rich cousin of Europe, Germany, has no intention of lending any more money to Greece. Their thinking is that the drastic cuts have to come first, and Greece has to first show that they can live on what they make. Gee, kind of like we have to – or should! Until then, more refinancing and more loans becomes like giving a drunk another drink.

Ironically, it was Goldmans Sachs who worked with the Greek government a few years back to convert some of their debt into complex financial instruments that nobody could really understand. It did make their finances look a lot better than they actually were. That is what it took to get Greece admitted to the European Union at the time. Ah, shuffling debt around, like we don’t often do that, transferring money from credit cards to lines of credit, and so on. But the chickens always come home to roost.

Finally, as a result of the debt rating for Greece, our Canadian dollar dropped over a cent. It did, but what really happened is that the U.S. dollar rose a lot. Investors were fleeing the Euro and getting their money out of the volatile environment over there, and going to a safe haven for their money – which is the U.S. So it was way more of a U.S. dollar increase than a Canadian dollar drop. The good news is that the U.S. needs investments. Now, we’re talking trillions here, not “you and me” amounts of money. And more money into the U.S. economy allows them to keep interest rates low for some time yet, and that’ll help the economy to speed up, and gives time for the housing market to heal.

Yes, we’re all in this together. What happens in Greece affects us. Because we’re all in one economy together, and money, debt financing, and investments don’t have any borders. Whether we like it or not, some far away problem becomes our problem literally overnight.

After a week in Kansas, I wanted to share a couple of U.S. stories from the world of finance and credit. They’re certainly insights that make you think or just shake your head:

You knew this day had to come: Atlantic City is the #2 gambling destination after Las Vegas in the US. Within ten hours of Atlantic City, there are more than 100 million people to draw from, and that’s a pretty huge market. While it’s possible to get cash advances from credit and debit cards in every casino on the planet, Atlantic City has gone one big step further. Gaming laws have now been amended to actually allow people to use their credit cards right at the blackjack and craps tables for a cash advance! Yes, you heard that correctly. Just sit down at the blackjack table and pull out your credit card. So far, only the Trump Taj Mahal has implemented it. But you know it’s only a matter of time before every casino in Atlantic City, and then Vegas, will roll this out, just to keep up.

JP Morgan Chase, one of the big six credit card issuers who control two-thirds of all credit cards, just announced doing away with a bunch of affinity cards. Those are cards for a specific retailer, where the merchant receives a kick-back. Gone are the Avon card and Starbucks. And if you’re a basketball fan, they also couldn’t get enough interest in the credit cards for the Detroit Pistons and Orlando Magic. Gee, you think the world can do without a few more credit cards??

On television, there’s more and more happy talk about the U.S. economy. While that may be true, in some areas, the foundation of people feeling more secure about their finances is always the value and equity in their homes. And that isn’t getting much better in many of the so-called “bubble states, where there are still over 3 million foreclosures expected this year alone.
But the no-service Bank of America is now seeing the light, and are prepared to do principal reductions of up to 30% on people under water. That is, they’re actually now prepared to help, after writing off billions of dollars in foreclosures. Principal reductions means they will actually cut the balance that people owe on a home that may be worth half of their mortgage. It’ll apply only to sub prime mortgages with insane interest rates, but it’s a start to actually help people and give them concrete hope. They finally figured out that they didn’t need to lose tens of billions of dollars kicking families out of their homes, and then take a massive bath on trying to sell literally millions of empty houses. This is going to be less than half as expensive for the bank in the long run. Too little too late for a ton of families but better late than never…