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Your Kids Are Watching and Learn From You

Don’t underestimate how much your kids learn from your behavior with money, credit, debt, budgeting, impulse purchasing, and savings. It’s all about your behavior with money, and very little about what you say. Since 80% of teenagers never take a class on finance or credit, you’re it. What you do today is what they’ll likely adopt for the rest of their lives.

Next time you (or your child’s grandparents) are looking for a present for an eight year old (or older) consider buying them a couple of shares of stock in their favorite company. If they love a certain game, clothing line, or shoe company, one or two shares of the company stock will have them become interested in more than just the product.

It’ll give you a great way to have them look at the stock price each month, watch what happens when a new product is released, or search the company web site for any announcements. Your son, daughter, niece, or nephew now has a gift that keeps on giving and teaching. When you’ve piqued their interest in following the stock and learning some basics, you can easily expand the lessons to include mutual funds. That’s when the lessons of diversification, risk, and more come to light. At that point, you can also consider matching any of their savings to buy more mutual funds as a huge incentive to start saving. It’ll be the biggest gift you can give, and it’ll pay off for their lifetime.

If you have a teenager in the house, it’s critical you teach them about credit. An easy way is to give them a make-belief credit card to use or abuse as they see fit. Give them a piece of paper with their name on it, a credit limit, and an interest rate. Make the rate one percent per month, it’s a great credit card rate and easy for you to calculate. Give them their allowance like normal and allow them to charge on their card up to its limit. Don’t harp on what they owe and don’t write it down for them (you just keep track yourself). It’s the same way your credit card company treats you. At the end of the month, give them a note with the old balance from the month before and the new charges. Add the one percent interest and a minimum payment of 10% that comes right off their allowance.

Take it as far as you’d like, but there are lots of important life, credit, prioritization, and debt lessons in this exercise. Soon, your son or daughter will be at their limit, they’ll have payments, and interest keeps growing. They may not be making any progress on reducing the balance,, their allowance is being eaten up by something they spent months ago, but they can’t go in arrears.

Or, perhaps your son or daughter immediately sees the convenience, and also the danger of credit cards. Take the exercise seriously and don’t give in to the first whining that your teenager is now broke and it’s your fault. After all, in a few years this game will become very real, very quickly, and involve lenders who couldn’t care less about anything, as long as they are paid and making a profit.

Getting Started Establishing Credit

If you’re 18 to 21 or so and want to establish credit, there are a couple of things you need to think through first. Once you do establish some credit, how sure are you that you can pay it off each month without fail? Just hope and optimism aren’t enough, and nothing kills your credit rating more than going past due even just once.

Yes, building up credit can cost you some fees and interest. If you’re smart about it, paying some of these is probably a worthwhile investment in building a solid credit foundation. There are five common ways to get started. All of them are based on the assumption that you’re employed, have sufficient income, and have no previous credit problems:

Joint Visa or MasterCard. If you can get your parents to apply for a joint card with you, you’ll be able to use their good credit rating to get one with a decent limit. If your parents read this, the advice would be to never actually give you the card – period. It’s meant to establish credit and not to give you permission to spend. The card reports to the credit bureau and starts a great track record for you, but it should stay in your parent’s possession and only get used twice a year for $20 or so, just to keep it active.

Secured Visa or MasterCard. Secured simply means a cash deposit in the amount of your credit limit is placed on deposit as collateral. Other than this deposit, the card looks and charges exactly the same as unsecured cards, and also comes with the usual late and over limit fees like all others. The deposit stays in place until the credit card is closed or changed to a regular account. It’s an excellent start and doesn’t need a cosigner. You want to confirm that the fine print states that they’ll switch you to a regular card after 18-24 months of on-time payments.

Department store cards. You’ll generally be approved without previous credit for a very modest limit of around $250 or so. It’s not much, but it’s an excellent start. Who knows? It may get you 10% off the day you apply, just make sure it’s one of the last times you actually use the card! Huge rates and a tiny limit means you’ll want the credit rating and not use the card.

Co-signed loan. This is the most common first loan for younger people. The co-signer, usually a parent, is equally responsible for the repayment as you are. It’s the reason lenders almost always want a family member. If your parents are looking for advice, it would be to never co-sign anything for anyone. That isn’t a double standard – it just depends on who is asking for feedback. Often a smaller loan, or an increased down payment, can eliminate your need for a co-signer.

Car loan. Assuming it’s a reasonably priced used vehicle, a 30 to 50% down payment through a reputable dealer may get you financing without a co-signer. A family member is better protected by giving you a portion of the down payment instead of signing on the entire loan with you. But car loans are still the most common way most young adults establish credit. You just need to assure it requires the world’s smallest payment and that you know the price of your insurance up front.

Just be really clear that you’re wanting to establish credit and NOT establish debt! There’s a big difference and not realizing that will be very very expensive. Be careful out there.

Not a Good Week For the Royal Bank

It hasn’t exactly been a good past week for the Royal Bank. Let me get this straight: They get a bunch of temporary foreign work permits from the government, bring in a team from India. That team is getting trained by Royal staff to take over their jobs. Then the foreign workers go back home with the jobs and the Royal team is out the door.

Nice…and then their apology, which was really a non-apology didn’t make things better before the weekend. They called it “part of normal business practices.” Ironically, that outsourcing story happened the same month as their notice of service charge increases went out. Really makes me wonder… Now, they’re not alone in outsourcing. It’s just that this story got traction. Even back last summer, a family member received a phone call within days of depositing $30,000 into his chequing account. He asked if “they were calling from Canada” because of the heavy accent. The answer was: No…

With most huge financial institutions, and other retailers for that matter, the larger they get, the more they turn into dinosaurs. They’re slow to react and tone-deaf. They’re less and less focused on customer service because you’re one customer out of millions. With those odds, what are the chances they’re really motivated to help you? Still wonder why I’m such a fan of credit unions where even the CEO and Board of Directors live within 100 km of you?

If you remember a few months ago I detailed the horror I had to go through with the Royal on the death of my father. It’s now the seventh month and they STILL send his mail to the address of a dead person – in spite of four written notices and documentation. Did I say dinosaur already?

Are Credit Card Surcharges Coming?

If you’ve ever been at a U.S. gas station you’ve seen the double pricing signs: One price for cash and another for credit cards. It looks like that’ll come to Canada soon.

Retailers pay between $5 and $6 billion in merchant fees to accept credit cards. It’s part of their cost of doing business, and you have to know a ton of that is included in their pricing. Now they want the right to charge extra if you’re paying by credit card. In other words, they want you to pay the 2 to 3% discount they have to absorb.

It started in the US in the mid 2000’s with lawsuits against Visa, MasterCard and American Express. There, just like in Canada, when a merchant signs up for credit card acceptance, they agreed not to surcharge, and to treat credit cards as cash. This is a restriction that ended in the U.S. just last year. And remember what I keep saying: What happens in the U.S. comes to Canada sooner or later.

Credit card issuers want to make money, retailers want to make money, and you want the points, perks, or free toaster. Credit card companies keep adding annual fees and compete to get into your wallet with more perks. How do they make even more money? Different credit cards with increased perks, but also increased annual fees AND higher merchant fees. The Visa Signature card, for example has a much higher merchant rate than normal cards. I’m just setting up a U.S. merchant account and those cards increase my discount charge by over 50% compared to others.

Should I have the right to refuse the card or to surcharge you if you want to pay with it? Of course! Should Visa or MasterCard be telling me what I can and cannot charge? Of course not! It just becomes a challenge for any retailer who wants the business but not all the increased backdoor costs that you don’t even know exist! You might not be happy with that answer, but you do have the right to pay with another card, to pay cash, or by debit card.

Looks like Low Rates Will Be Here a Bit Longer

If you’re a homeowner, it looks like interest rates will stay low for at least the next year or so. According to a new Bank of Montreal economic study there isn’t a reason to expect higher rates anytime soon. That’s great news if you have a lot of debt, especially a mortgage or line of credit.

Right now, you can get around a 3% fixed five year mortgage. That’s incredibly low and worth taking advantage of. In a few years, when people are paying five to eight percent rates, you’ll look back and wonder how they every dropped this low.

Your credit card rates are insane anyway and a move in rates won’t impact them much. But you have to know that rates will rise and get back to some kind of historical averages. The place where that can become a real problem is with two really large debts that most people tend to carry: their mortgage and line of credit.

Lines of credit are set off prime rate, or prime plus one or two percent. They’ll change monthly so a change in interest rates will hit you immediately. And it’s likely that your balance is such that you can’t readily pay it off when rates do rise, so be carefully.

For your mortgage, low rates give you the opportunity to lock them in. If you’re up for renewal in the next year or so, you should really really consider a five year fixed term. That’s assuming you’re not moving in that time, that you’ll shop around, and don’t settle for the posted retail rates. Right now you can get close to a 3% fixed rate!

If you’re considering selling a low rate also helps the value of your home. Most people look at the payment they need to make more than the price of the house. Assuming they have a down-payment, and can afford $1,500 a month, the buyer can afford a purchase price of around $310,000. If your house is way above that, the buyer won’t qualify and can’t buy it. If rates move to 6%, that same buyer can now only afford a purchase price of around $235,000.

A three percent change in interest rates reduce what any buyer can afford by $75,000. That means fewer people can afford your home and it’s likely that prices will come down as fewer buyers can afford what’s out there. Your house hasn’t gone bad, it’s just that a prospective buyer can only qualify for the same payment, but that extra $75,000 goes towards interest and not the principal.

Gotta love the low rates if you’re a buyer or have a mortgage. But what goes down must come up.

What’s Your Bank Balance, Gift Cards & Target

What’s the balance in your checking account? In February 2013, the finance minister of Zimbabwe admitted that the entire public accounts of the country had a balance of $217. Yikes…one of the best examples of a country becoming a basket case because of politics way more than economics.

Target is coming! Many people are pretty excited about the Target launch in Canada. If you’ve shopped at their stores in the U.S. you’ll be very disappointed. Sure, the stores will look the same, but you’re dealing with Canadian duty and prices. Don’t look for the cool US-type deals and prices. They will have the Target debit card and MasterCard. Both will give you 5% off right at the store register. The applications are on the Royal Bank site now. If you think you’ll shop there a lot, it may be worth getting. The rate is 20% like every other regular card but no annual fee.

Gift card heads up: Criminals are now able to get your code number from a gift card. Investigators don’t know how they do it, but it’s happening. You get a gift card and go to the retailer to purchase something only to find out at the register that the card has already been used up. All you’ll get told is that, sorry, nothing they can do – not their problem. Pursue it, report it, and don’t give up. If you’re giving a gift, make it cash. If you have any gift cards, use them up as soon as possible. Better safe than sorry.

A Very Personal Tale of Two Banks

I strongly believe in a paraphrased saying that you can easily judge a business by how they treat those who can do nothing for them. In other words, how you get treated when you need help and not when they know they’ll make a profit from you.

My stepfather recently died and I became executor of his estate. After I had all the legal documents necessary, I went into the Royal Bank where he had dealt for over 50 years, but that started off badly and got worse. All I had wanted to do is to hand someone his credit cards and ATM cards to close, and a letter asking that his accounts be blocked. The receptionist asked me three times if I had an appointment. No, sorry – I didn’t, and was only in town for the funeral and to handle these basic starter issues on the estate. “Nobody has time unfortunately – we do have clients with appointments.” What I wanted to say was that my stepdad didn’t die with an appointment, but managed to simply ask to speak to a manager. Surely someone in this huge branch would have five minutes for me.

An assistant manager did come out to also ask if I had an appointment. At that point, my perception was that this question was just code for “please just go away.” She did volunteer that I could go to any Royal Bank to deal with this. What? I can’t get into the branch that has more than $1.3 million of my parents’ deposits? Did she really believe I’d have more success at a branch that hasn’t made some significant income from my dad over all these years?

After about half an hour I did get to meet with an account manager. When she took me into that wing, there were about 14 total offices. Three had their lights out, making me figure that those staff had the day off. But 11 offices did not have a single customer in any office! A half hour at reception fighting to get in, being re-educated that I really should have an appointment, and in the 10 minutes I was in the office wing there wasn’t a single customer – anywhere!

A month later, a staff member left me a phone message on some estate questions. I returned her call twice, then waited over three weeks with no reply. At that point, my only option was to start communicating with the Royal through the estate lawyer…at $375 an hour…until one of their Vice Presidents contacted me to apologize for dropping the ball. To this day, I still can’t get their cooperation in a number of areas. But I’m still getting the odd call with an apology for dropping the ball…again…and again…

There’s some good news, however. When I went to the CIBC in Montgomery for the same requests, it was as though I’d entered into a different world. Not the world of the large no-service banks. A lady named Maria, one of their Financial Services Reps immediately took me into her office and made the call to cancel his Visa card. She blocked the accounts, closed the ATM card, and even printed out his entire account listing and balances that was going to be needed by the estate lawyer. It made my day from hell a whole lot better to know someone actually cared and was helping me for no financial gain or profit.

If you’re ever going to die, remember that someone will be your executor and will need to deal with whoever you chose to trust with your business for two or three years more!

We’re Going Broke At a Slower Pace

Newly released averages from TransUnion, one of the credit bureaus shows what we talked about recently. We’re increasing our borrowing, but at a slower pace. Great. Kind of like someone on a diet just having three pieces of cake, instead of four. We’re still growing our debts which are already significantly too high.

On average we owe $3,600 on our credit cards. But remember that about half of Canadians pay their balance in full – hurray. So the rest of us owe over $7,200 – and that should be a concern.

Lines of credit are now over $35,000 on average. But think back not that many years ago. We used to get a personal loan if we wanted to borrow $10,000 for renovations or $15,000 for a motorcycle. Well, making a loan costs the bank about $200 to $300 in setups, credit reports, etc. So they moved us to lines of credit. Now a loan had a three, four, or five-year term of fixed payments. Make all the payments and you were done with this debt. Yet, a line of credit makes us the loans officer. We can pay as little as interest only (newsflash: Most do) or as much as we want. We were sold on convenience and hardly anybody gets an actual loan these days, with the exception of vehicles. Now we can pay as little as we want and the banks don’t have to keep making new loans.

The downside is that now, on average, we take more than a decade to pay off our lines of credit. That’s assuming we don’t just roll them into a mortgage refinance. It used to be four years of loan interest, now it’s a decade or more of payments. Great for the lenders, very bad for us. Without much of a rise in incomes and all the other monthly payments, it’s just natural to fall back on the least amount we can pay – and we do.

Banks really do have the brightest marketing minds in the country. They’re so great at selling us something that they make a profit on and helping us with our going-broke plans.