Both Cell Phones and Credits to Become More Understandable
David Christianson, CFP, R.F.P., TEP
File this under, “I’ll believe it when I see it.”
First, the government directed credit card companies to make their fine print understandable to customers, and now a new code of conduct for cell phone companies will compel them to make sure their young consumers actually understand what they are signing.
What will they think of next?
In May, the Conservative government introduced a range of new rules for credit card companies. Among these are the requirements to display the facts about grace periods and interest rates in a summary box, right on the monthly bill, and a calculation of how long it will take that customer to pay off the outstanding balance, if only the minimum payments are made each month.
I think this is a great idea, as many people don’t seem to understand that only making the minimum payment is not a way to pay off the debt.
A rough calculation on many cards with a significant balance suggests that it can take 10 years to pay it off, even if no new charges are incurred. This is because the minimum required payment each month basically covers the high monthly interest charge and leaves only a small amount for principal reduction.
As a reminder, the average bank credit card in Canada charges 16% to 18% annual interest on the outstanding value. This is not the place to borrow. Your worst case on an unsecured line of credit these days is about 6%. If you have liquid collateral or an unencumbered house to use as security, you may get a loan for less than 3%. Any of these alternatives is much better than carrying a balance on a high interest rate credit card.
You also likely get mailings all the time from credit card issuers offering to take over your current outstanding balance and only charge you 6% or less. These are good offers, but read the fine print carefully. Some will only provide the low rate for a limited time. Almost all will have a higher rate on new purchases.
If your situation is such that you have to carry a balance forward, shop for a card that has an interest rate below 10%. They exist, though you will give up other perks like travel points or cash back rewards. The card companies still make 3% to 5% commission on all of your purchases, and they make a nice profit on the lower interest rate as well, provided they have a low enough default rate.
The Financial Consumer Agency of Canada – a federal government agency – provides comprehensive card comparisons on its website. The address is www.fcac-acfc.gc.ca.
Perhaps the biggest improvement in the new regulations is a mandated 21-day interest-free grace period on new purchases, when the cardholder pays the outstanding balance in full. Currently, there is no required grace period, though each card company provides its own.
This really enhances the cash management possibilities for those who use their credit cards as a purchase tool, and not as a source of long term credit.
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David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc.