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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

More Rob Carrick and money coverage

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