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(Don Bayley)
(Don Bayley)

Rob Carrick

Customers feel the pinch as banks cut risks Add to ...

Today at noon (ET), join Rob Carrick in a live discussion about savings.

Shawn Flannigan found out a week ago what happens when banks get more careful about lending money.

He received a letter from TD Canada Trust telling him the interest rate on his unsecured line of credit will rise to 9.75 per cent from 6 per cent on April 2. “This is going to hurt people, especially in this economy,” said the resident of Peterborough, Ont. “Do they really need to make more money off our backs?”

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With the banks facing some challenges right now, the answer to that question has to be yes. The federal government has urged banks to tighten their lending rules for mortgages and credit lines, and at the same time the economy has turned soft. Revenue gains are hard to come by in today’s world, and that’s where Mr. Flannigan comes into the picture. He’ll be paying more to his bank, and so quite possibly will you in the months ahead through either higher rates or higher fees.

In the case of some TD line of credit customers, they’ll be paying quite a bit more. At a time when the Bank of Canada’s overnight rate is 1 per cent and the major banks’ prime is 3 per cent, borrowing at 9.75 per cent seems like a blast from a distant past of much higher rates. “At TD Canada Trust, it is important to us to be able to provide a wide variety of products, services and features to suit a range of customer needs,” the bank says in explaining the rate change to clients. “In order to do this, we regularly review our accounts and sometimes, we adjust our pricing.” Note: I am posting the letter on my Facebook personal finance page.

The federal government’s concern about bank lending has focused on mortgages and home-equity credit lines, which differ from unsecured credit lines in that you pledge your house as security on what you borrow. It’s all about cutting risk – the risk that people will be swamped by debt when interest rates rise and the risk that the housing market will overheat and then fall sharply.

Controlling risk is also behind TD’s new line of credit pricing. TD spokeswoman Barbara Timmins wrote in an e-mail that it reflects a “risk-based” approach that factors in a clients’ credit situation and relationship with the bank, specifically the amount borrowed and the investments held.

“Changes do not apply to all customers,” she wrote. “For those customers experiencing a change, 60 per cent will see their rate go up and 40 per cent will see their rate go down.” Rate increases range from 0.5 to 3.75 per cent and decreases range from 0.5 to 3 per cent below current rates.

Mr. Flannigan’s experience shows you can be a good TD customer and still get whacked with a big rate increase. He and his wife have chequing and savings accounts with the bank, a Visa card and a car loan. Two of his sons have student lines of credit with the bank, and another son has a car loan.

“I’ve had my line of credit for five years and I’ve paid my interest and never missed a payment, he said. “Getting that letter they sent, I blew a gasket.”

Even at the best of times, banks raise fees on their chequing and savings accounts. Recently, though, we’ve seen a wide variety of new and higher charges. A quick survey includes the introduction of a $260 fee at Canadian Imperial Bank of Commerce to close down a home equity line of credit, and Bank of Nova Scotia’s move to increase the fee for debits that go beyond the amount included in your monthly account charge. The cost will rise to $1 from 65 cents. (Scotiabank is also making changes that expand free banking for students and youth.)

Be alert for fee increases when reading your monthly account statements on paper or online. Let me be an example to you of what happens when you let your guard down. I set up an online savings account at President’s Choice Financial back in fall 2009 with $20 in it. After paying a penny in interest each month going back a long while, PCF last month stuck me with a $20 dormant account fee that left a balance of 26 cents.

A fellow at PCF’s call centre informed me that I couldn’t just dump money in the account and leave it there. I thought that’s what savings accounts are for, but what do I know?

_______

TD Canada Trust customer Shawn Flannigan recently was told the interest rate on his unsecured line of credit will rise on April 2. Here are the details, along with a comparison of with TD’s rate on a home equity line of credit. Home equity credit lines are cheaper because they're secured by the client's home. Note: TD's current prime rate is 3 per cent.



Old Rate

New Rate

Unsecured credit line

prime + 3

prime + 6.75

Home equity line of credit

prime + 1

prime + 1

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