I swear the internet would break in half if I wrote something about an investing or savings product with an interest rate or yield of 20 per cent. Credit card interest rates of 20 per cent are just the opposite. Does anyone care?
Early in the pandemic, the Bank of Canada’s reference rate for borrowing was hacked down to a mere 0.25 per cent. Credit card interest rates never gave a centimetre. Most cards have remained at 19.99 or 20.99 per cent, with low rate cards in the range of 13 per cent. Pro tip: Never carry a credit card balance unless you’re in a financial emergency.
I’m starting the newsletter off in 2022 with a back to basic series – you can catch up on previous installments below. Paying off high interest rate debt is as basic as it gets in personal finance. Think credit cards, and also unsecured credit lines and consumer loans set at rates much higher than the 2.45 per cent prime lending rate at major banks.
A survey done a few years ago for the federal Financial Consumer Agency of Canada found that 41 per cent of credit cardholders carried a balance from month to month, which means interest applies. The FCAC offers a credit card payment calculator that highlights how much damage is done when you carry a balance. If you were to make a minimum 3 per cent monthly payment on a $2,500 card debt at 19.99 per cent, it would take 16 years and 8 months to pay the debt in full. The total interest cost would be $2,862.
Credit cards are a necessity in a financial world where so many purchases and bookings are done online, and you can earn useful rewards using cards. But e-commerce promotes the idea of frictionless buying – you simply click a few times and the item’s on its way to you. The cost is only tangible when you get your credit card bill in the days or weeks ahead.
Here’s how I manage credit cards: Instead of waiting for my bill and paying off a blob of expenses in one go, I use a pay-as-I-go approach. A least once a week, I pay whatever expenses have come up recently. If I put a big expense on the card, I make sure there’s cash in the bank to cover it. By the time my monthly bill arrives, every expense on it has been paid in full.
Credit card rates are set by banks according to a variety of factors, including fraud, defaults by cardholders and cost of providing an interest-free grace period between the time purchases are made and the due date for your payment (assuming you pay your balances in full). Credit cards are unlike credit lines and floating-rate consumer loans in that the cost of borrowing doesn’t change along with the Bank of Canada’s reference rate.
A gameplan for debt repayment: Credit cards always come first, because of their high rates. Next come credit lines and loans, which could get more expensive if rates rise this year. Last come mortgages, whether they’re fixed- rate or variable rate. Mortgages are typically one of the cheapest ways to borrow.
Back to basics Part One: Now’s the time to revisit the most basic rule of personal finance
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Rob’s personal finance reading list
What’s happening in housing
This is amusing – Toronto realtors on the bad advice parents are giving their home-buyer kids. The lowball offer stuff kills me. Yeah, that’ll work. Now for a tax expert’s outline of a case where Canada Revenue Agency went after someone who it believed had inappropriately claimed the personal residence tax exemption when selling a property. Unless house price increases level off, more people are going to consider the idea of co-buying a home with a friend. Here’s a hot take on housing from someone with an anti-poverty and social justice background: “Canada’s housing market is sick and grossly distorted.”
What’s your biological age?
A discussion about how financial planning will in the future focus on an individual’s biological age, which means their expected lifespan based on health factors. The benefit is a much more precise analysis of how much money you can spend in retirement.
Introducing the vertical credit card
The design of credit cards is changing as a result of the rise of payment by tap instead of inserting a card so its magnetic stripe can be read. One new card has a vertical format, a contrast to the traditional horizontal design. The idea is to make the card more convenient to use.
Your credit score and your mortgage
How your credit score influences the interest rate you get on a mortgage, and the amount you can borrow.
Ask Rob
Q: I have read a lot about the 60/40 portfolio being a thing of the past. I am just starting retirement and have a significant amount of funds in the Vanguard Balanced ETF Portfolio (VBAL-TSX). Given all the talk of interest rates increasing and bonds dropping in price, I am concerned about the drag on VBAL returns and am thinking to go with the Vanguard All-Equity ETF Portfolio (VEQT), which is 100 per cent stocks, and then purchase one-year GICs because liquidity is not an issue. Appreciate your thoughts on this.
A: To start, a 60/40 portfolio means 60 per cent stocks and 40 per cent bonds. Some in the investment industry believe that’s too much bond exposure in a rising rate world. Vanguard is not among them – the company believes 60/40 still makes sense. Investors who want to reduce bond exposure are taking on more risk, as well as upside potential, if they move some money to stocks from bonds. An alternative is to substitute guaranteed investment certificates for bonds. GICs don’t fall in price when rates rise, and neither do they gain in value when rates fall. The cost of this stability is that GICs cannot be easily sold before they mature, unlike bonds. GICs do potentially offer higher rates than bonds.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
A handy listing of tax numbers for 2022, including limits for contributions to RRSPs, TFSAs and the threshold at which the Old Age Security clawback starts.
The Money-Free Zone
A man and his frog, Tony. A story told in tweets.
What I’ve been writing about
- What to do in 2022 with housing, jobs, stocks and crypto if you’re a millennial or Gen Z
- A solo senior sells her home – is she financially set for life?
- Six ideas for tuning up a portfolio to thrive in a challenging 2022
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Are your parents giving you money? • Why it’s time to stop shaming the renting lifestyle • Is now the right time to buy a house? • Why are young Canadians leaving the cities they love? • Eating in: How COVID has shifted our food spending • Crisis-proof your finances? • Can you afford to live downtown? • The cost of kids
- ✔️ The housing file: The housing boom is ripping apart the financial fabric of Canada • Shut out: A well-qualified millennial home seeker throws up his hands after losing multiple bidding wars • Big city housing affordability is over – now what? • She sold her Toronto house to retire somewhere cheaper, but it didn’t work • How young adults and the whole country win with a tougher mortgage stress test for home buyers • Can’t afford your house? It’s likely not your fault
- 📈 Investing: Robo-advisers have grown out of the novelty stage. Here’s help in finding one right for you • The 2021 ETF Buyer’s Guide: Best Canadian equity funds • The 2021 Globe and Mail online brokerage ranking: Who’s best for investing ... and answering the phone • Are these the stock market returns of a lifetime? • On the cusp of retirement and wondering about an ETF that pushes the limits on aggressiveness
- 💰 Your money: The five most important numbers for checking the health of your personal finances • Today’s freakishly low mortgage rates can’t last. What will pandemic home buyers do when they rise? • There’s a cost in money, isolation and family stress when seniors choose to remain in their own private homes • Taking CPP early can cost you $100,000 and limit your long term options • Fleeing the city for the suburbs? Watch out for higher property taxes, more cars and other costs
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Rob Carrick