This & That: Crap Happens Edition
Posted by Gail | Filed under This & That
The ca-ca is hitting the fan all over the place. A headline on the front of the Globe and Mail’s Report on Business section this morning says, “U.S. recovery jeopardized by troubled loans, shrinking credit.” Since we’ve built our economy on credit, the fact that credit is now disappearing (almost as fast as American banks!) means we have less Not Money to shop with. In Canada, we have yet to bump up against the problem of mortgages having to be renewed at significantly higher interest rates (you didn’t think they’d stay this way forever, did you?). That’s when the U.S. story will come home to Canada.
A wrote: I have been told by my employer that it is very likely that I will be laid off before the end of 2009. After my initial panic, I started taking concrete steps to prepare myself for this. I have about $6000 in consumer debt, and have been paying it off at around $400 a month. I also contribute $300 a month to my RRSP and have no emergency account (that was next on the list!). But I do have a line of credit with a 15,000 limit (the one I am paying off above). I want to accelerate my debt repayment to be as close to debt-free as I can be by the time my job disappears. My questions: In this case, should I cancel or reduce my RRSP contributions? If so, should I funnel that money into debt repayment or an emergency fund? Any other tips for somebody facing down unemployment? I am single, 33, and own a 180,000 condo for which I have a 135,000 mortgage. The mortgage payments and strata fees alone will really challenge me on EI.
A, I’m sorry to hear about your big changes. Know that you can weather this storm with a plan. First, stop making RRSP contributions. Channel that money to a Tax Free Savings Account (somewhere like ING that has a good rate) and build up your emergency fund. Keep making those payments against your line. Figure out what your essential expenses are each month, and cut back now to start getting used to living on less. Channel anything you’re saving to your emergency fund. Find out from EI what your benefits are likely to be so you can start planning. Update your resume and start putting out applications now for a new job. If you get a new job, move on your terms. If you end up unemployed, consider what you want to do next: same job different company, different job, back to school. You’d be amazed at the variety of programs EI currently offers to help you see your way through this mess. If you want to keep your condo, consider a roommate or any other ways you can offset your expenses. That’s probably enough for now. Write again if you have more questions.
Carrie wrote: I am 22 and my husband brad is 24. My husband started a landscaping business with his father in 2008 they took out a $40,000 loan and used it all to buy equipment. His father then decided not to be apart of the company anymore. My husband works 6 days a week and 10-12 hour days but the company is always going from 39,000 to max to back down to 39,000 he is never making enough to start paying back the loan. Would a loan this size affect us getting into a house in the future? If so should he get another job and just start paying the loan that way? We feel like we cannot get ahead. I am working full time and we try to just live off mine however our savings is gone due to him not taking a wage and we are just making it by month to month. We are so confused as too what we should do and his parents want nothing to do with the company so we are feeling very lost. Please help!
Carrie, I’m sorry this is a tough time. Very often people go into business without doing the research they need to do to make sure the biz has a fighting chance. If your husband is working 72 hours a week, where is all the money he’s making going? You say he’s not taking a wage, so where is the money? If your loan is at 8%, the interest would be only $267 a month… should be easy to handle that. If your interest rate is higher, multiply the $40K by the interest rate and divide by 100 and then again by 12 to see the monthly interest cost. To pay off the biz loan in 5 years he’d need to be paying $666 a month against the principle. Again, if he is “landscaping” and already has all his equipment then his ongoing costs should be low and coming up with the $1,000 a month — just $250 a week — to pay off the loan shouldn’t be a problem. Maybe he’s not charging enough. My local guy charges $60 a pop and he says he does about 9 visits a day, so he’s pulling in about $3200 a week. I think you guys need to sit down and figure out the money part of the business if you’re every going to see things turn around. Work it out on paper. Make a plan.
D wrote: I have finally started getting out of debt instead of further into debt. Last November, I removed the overdraft protection from my bank account, setup a monthly budget (forecasted for the entire year of 2009, I have started the forecast for 2010 already). I paid off my one and only credit card, now paying off a personal loan (ugly debt) for a truck I bought (was going to be paid off by then end of this year) and then I was going to tackle my huge Line of Credit debt. Like you mentioned, get the high interest paid off first. Well I had a great interest rate on my LOC of prime + 1%. I got a noticed in the mail that yesterday stating that they will be increasing it to prime + 4%. So I called (very upset, I have been with this bank for about 20 years) to get my interest rate decreased. They said they would have to run a credit check (Question 1: Do borrowing institutions have to do a credit check to lower your interest rate?). They came back and told me that according to the credit check, they should put the interest rate at prime + 4.55%. I hung up very upset. Question #2: Can I go further with this request? Or am I S??? out of luck? Question #3: If I go to other institutions to find out what they can do for me, would or wouldn’t that not look good on my credit report because they would have to do credit checks? Any guidance or suggestions would be much appreciated. I feel that they know that I’m getting my finances in order and they are eventually not going to make money off of me because I’m paying off my debts. I know I dug my debt hole myself but I’m really frustrated that they did this for a long standing client. I told the guy that I will be closing my accounts if my interest rate would not change. He said, because of the current financial situation, everyone is increasing their rates. I probably won’t close the accounts but I will not use them, as I believe (correct me if I’m wrong) this would hurt my credit score if I closed them. Love your show. Turned my life around in more ways than you can imagine.
D, I can see why you’re so upset. And I’m sorry you’re in a tough spot right now when you’re working so hard to dig out. Unfortunately, the credit markets have changed a lot in the last few months, and lenders are using the tightening up of money as their rationale for raising interest rates, sometimes quite dramatically. They are also trying to cover their butts for all the loans that are going into default by hiking rates to make up the difference. You — and your previous bad credit behaviour — are caught in their wide-spread net. More and more people are going to have to deal with this over the coming months.
Okay, so what to do. First, you should check your credit history to see what’s there that would be causing your rates to go up. There actually doesn’t have to by anything there since the cost of money is going up and so interest rates are rising. Added to that is the fact that lenders are arbitrarily jacking rates… no rhyme or reason.
Next, you should ask for a face to face meeting with your lender to go over the situation, the steps you are taking, and what you’ll need to do (from his perspective) to get back to those lower rates. If you feel you have a strong case — lots of assets, a strong repayment history, etc. — you might want to shop your business around. However, if you do not have a strong asset base (equity in your home, RRSPs, other investments), and your credit history is in the least bit messy, skip the shopping trip because you’ll fare no better elsewhere.
Only time, a focus on getting to debt free, and a sparkling credit history will take care of this problem. It will be more difficult with a higher interest rate, but if you’re determined to get to debt free, you will. And when you’re out of debt and on to building strong assets, you’ll be in the driver’s seat.
G wrote: My husband and i own a small business which we have barely been able to keep up with in terms of bills. The business has survived the last 7 years but it has been a struggle. We find ourselves in a bind because we have 3 more years in a contract and lease with the franchiser. I don’t know how we can keep our heads above water with the economy being the way it is. I have been asking my father to help us out financially but we cannot keep asking him every time we run out of money. We live very frugally as i know how to save and we try not to spend money we don’t have. What can you suggest us to do to be able to keep up with all the stress of running this business. I work as much as i can and am trying to find another partime job. This business has been a strain on our marriage for the last 6 years. Please help us. Thank you for doing such an important show that has helped so many other couples.
G, I’m sorry love, I don’t know what business you’re in or enough about your situation. Here are some thing to consider:
Could you renegotiate with your franchiser? In light of the current economic climate, would the franchiser give you better terms so that you would be able to make the biz work? That would certainly be better than watching you walk away because the biz went bust.
Are there steps you could take to grow the biz so you generate more income from it? Since I don’t know what biz you’re in, I have nothing else that I can offer on this front.
Do you have resources you can turn to (at the bank, local organizations, in the community) who might be able to help you re-assess how you’re running your business and what you might be able to do differently?
If you’ve trimmed your budget back and now you’re looking for extra part-time work, I’m not sure what else I can add. You clearly know what you need to do. On the marriage front, I hope you see yourselves in this together, and are not blaming each other. You need to be strong right now. Undermining each other won’t help. Be brave. And try to find something to laugh about together.
I know when things are tough all this advice seems so little compared to what you’re feeling. I’m sorry I don’t have more for you. Times are tough. Some businesses won’t make it. I wish you the best of luck with yours.
November 25, 2009 at 8:03 am
Great series of answers to readers questions. I hope we are not in store for a double dip in this recession, but if we are, We should all start getting prepared. I think to be prepared for a recession we should pay off debts and get an emergency fund as quickly as possible.
Great advice there Gail
regards,
Jason
November 25, 2009 at 8:06 am
Like D. I also got a letter in the mail yesterday that they were increasing the interest on my LOC to prime + 4%. And D, that prime that they use is the bank’s prime rate, not the bank of Canada prime rate so it will be higher.
The bank assures me that this rise is not a reflection of my credit history but is because of the current market conditions. In that case maybe I should call and ask to have it lowered back to where it was then since I don’t think I should have to pay for bad loans that should never have been loaned out to other people.
Oddly enough, my CC has arbitrarily lowered my interest rate for 6 months. I figure this is because we pay it off in full every month and collect points. They must be hoping that with a lower rate we’ll spend more and carry a balance.
November 25, 2009 at 8:47 am
I think Gail is on the money. This ain’t over yet, despite all the upbeat reporting on Wall Street gains etc. The rising unemployment rate in the US (now over 10% and if you factor in those who have given up looking for work, or those now working part-time down from full-time, the rate is around 17%) is now resulting in good mortgages going bad. That is, foreclosures are now starting to happen on homes with mortgages given to folks with good, steady jobs. These aren’t sub-prime mortgages.
Add in that rising unemployment rate means those who are unemployed only buy necessities and those still with jobs will continue to sock away their money instead of spend it, the predicted consumer-led recovery in the US is a long way off, if indeed it ever returns.
What it means for us in Canada – increasing trade deficits since our largest trading partner is the US (our trade deficits the last two months are the worse we’ve had in decades), more layoffs, higher unemployment and people who got laid off at the beginning of the crisis moving into real dire straights as their EI runs out. Personal bankruptcies were up 45% last month in Canada so don’t let anyone in the media or the banking and financial lobby and interests groups tell you it is.
All this to say, Gail’s advice is even more important than ever – get debt down and build up the emergency fund. I’m still contributing to RRSPs but I’ve scaled back my monthly contribution rate, diverting half what I was putting aside for RRSPs into the emergency fund to build it up so that I can survive a year if I were to end up unemployed. Debt is totally gone and the home repair fund is healthy enough that if something had to be done in an emergency the money is there.
I feel for those struggling right now – if I was still managing debt right now, I would be panicking about what to do if I was laid off. But in the year since I’ve been debt free I’ve put every spare nickel away for the life emergencies and building up the fund in the event I lose my job. So I’m sleeping easier but there are many out there who aren’t and I feel quite badly for them.
November 25, 2009 at 10:44 am
I have a question regarding A: A says she is paying around $400 per month on her consumer debt. Gail, you suggest that she maintain these debt payments while she is still employed.
Why didn’t you suggest making minimum payments to the consumer debt and banking the rest in her emergency fund in case she is laid off like her employer has warned her?
If she finds another job quickly, or the lay-off doesn’t happen, she can take the money from her emergency savings and put it on the debt, but if she is laid off and finds herself on EI for a while she may need that money to survive.
Would reverting to minimum payments in this case be wrong?
November 25, 2009 at 11:29 am
@Dana – I think A is right to keep paying the whole $400 on the consumer debt. It’s only a couple of months until she could potentially be laid off, so it’s not going to add THAT much to her EF. The interest she’s incurring on that debt is most likely much more than she could possibly earn in her EF. I think she’s better off saving the minimum payment scenario for when she’s actually unemployed. If absolutely necessary, as a last resort, if she’s desperately broke she can use that LOC later. If she doesn’t get laid off, then she hasn’t misssed out on maing her best possible payments to getting that pesky debt paid off.
November 25, 2009 at 11:31 am
I do want to say, though, kudos to her employer for giving her the heads up. A surprise layoff would be even more horrible, especially if you don’t have an EF.
November 25, 2009 at 11:55 am
I work for one of the 5 major banks and have never heard of a “bank prime rate”…we use the bank of canada prime….is there really such a thing as a bank prime rate??????????/…I really am curious…
November 25, 2009 at 12:07 pm
Dana:
I’ll admit that I am with you on this one.
If I were to be layed-off and my EF were less than 6-month of necessary expenses (includes the minimum payment on the loan), I would build that up before paying off that ‘lower’ interest debt. I would pay the debt using the greater of the minimum payment or the interest accrued each month.
If there is no lay-off, the EF is in place and repayment of the loan can happen at greater than $400/mo.
More points to consider:
Is there any severance?
EI does not pay for the first two weeks.
If EI has issues with your application, it could take a while before you see a penny from them.
I fully agree with Gail: Look for another job today!
November 25, 2009 at 12:14 pm
Sparky:
I thought that the bank’s prime rate is always greater than the Bank of Canada prime rate.
copied from their webpage:
Today’s Rates, TD Prime Rate: 2.250%
Effective Date APR 22, 2009
Bank of Canada:
V39078: Bank rate, 24/11/2009 0.50
November 25, 2009 at 12:17 pm
I too had a CC and my line of credit arbitrarily increase interest this year, after many years of being a customer at the same bank. I’m struggling to get out of debt, and I know with my high debt load there is little I can do to negotiate. I did call the lender, but they wouldn’t budge, and since I don’t have any assets and I knew that I should probably just tighten my belt and continue following my plan to get rid of my credit debt.
Thanks for publishing these letters – it makes me feel better that I’m not alone!
November 25, 2009 at 12:21 pm
Carrie:
I agree that you need a business expense plan. It’s the only you can know what you can charge to make a LIVING.
I know this reference is for another type of business, but it could get you started on making your own plan:
http://www.nppa.org/professional_development/business_practices/cdb/index.html
(Anyone wants to guess that I am looking at… and then why I have not started my own business yet!)
So use your last year’s expenses for the business as history and use this template to make sure you did not forget anything. NOTE that the template is based on the CORRECT assumption that one should take a salary out of their business and that you should have a retirement contribution.
November 25, 2009 at 12:28 pm
Sparky and Marie:
The “Bank Rate” is the rate at which the bank of Canada lends money to the banks.
The “Prime Rate” is higher than the bank rate and is the rate the banks offer to their best/ lowest risk customers (usually only for secured lending).
November 25, 2009 at 12:46 pm
I too had a CC (Capital One) that used to be at 17.55%. Then they sent me a letter that the interest rate was changing to Prime PLUS 17.55%. Luckily, they also gave me the option of accepting the new rate, or freezing my account at the current rate, which means I couldn’t use it anymore, and it would simply be closed when I finished paying it off. I chose to freeze the account.
November 25, 2009 at 1:18 pm
Wow,
What a frightening world it has become. I feel sorry for those who have consumer debt remaining during these times.
But all these statements on interest rates going up seem to conflict a bit with the sign I just saw on a bank – mortgage rates lowered to 2%. I am confused – is it just that my area in Canada hasn’t been hit yet – are the mortgage rates going up across the nation – or are they staying low (because they aren’t “consumer”debt)? Does anyone know? (I have a variable rate mortgage with a cap – so this does effect me to some degree).
November 25, 2009 at 1:32 pm
Great advice, Gail. Wall Street is happy because companies have been improving their bottom line by cutting jobs–in the long run, that just isn’t sustainable. I still think we have a ways to go.
November 25, 2009 at 1:38 pm
It is true that it is scary out there, but we should also see a bit different part of the picture that careless actions of some people who should not get credit card(s)/ or credit in general as such in the first place dragged everybody else into that big mess there is no way out straight and easy. Suddenly everybody can be scared of what may happen to them no matter how good their credit history is or how hardworking individuals they are. I am told that I have a decent job though I can’t see the money. I am underemployed (I have lived in Canada for over 4 years now; a lot of new immigrants share my fate)and more and more bitter how my potential is wasted. I feel really trapped. My husband has even better job than me (though much less education; he is Canadian) and even though we don’t buy anything extravagant, don’t eat out or go on fancy vacation, somehow I have the impression that we don’t do anything else than pay bills all the time and there is not much left at all at the end…
(
November 25, 2009 at 1:53 pm
My husband’s LOC also went up by 1%. The bank also used the “economic times” as their reasoning and even gave themselves a pat on the back for taking this long to raise his interest rates.lol
November 25, 2009 at 2:09 pm
Amelia, what bank are you with that is adding 4% to your LoC interest?
I’m divorced, taking over a mortgage on my own, and trying to get rid of stupid, stupid credit card debt ($11,000) accumulated over the years. I’ve got emergency funds stashed away for 8 months. I also have an open variable mortgage, currently at 3.25%, but I get the feeling I may have to move to closed and fixed interest soon.
I’ve got about $3000 left on my TD LoC at 4.75%, and have the remaining $7000 moved to a credit card offering 1.99% for 9 months. My old credit card company, RBC Visa, who I’ve been with for 20 years, just cannot offer me any deals for lower interest, after sending me their cheques for 2-4% for a couple of years.
I know I have about 8 months breathing space if everything goes to hell, but I can’t sit back and wait for things to get better. I’ve been getting a little work through new contracts and clients, but nothing really steady yet. But once I know that I have a couple of months steady work, that LoC balance is getting paid in full, and that credit card debt will be whittled down ASAP.
November 25, 2009 at 2:14 pm
ah yes, confusion cleared up…bank of canada does regulate the prime rate…the rate they set is what the banks use…unsecured lending is also based on prime…prime + …you can go variable or fixed on that as well…variable mortgages in the past have been prime -…so some folks are paying only 1% on their mortgages right now…cha-ching for them!!
November 25, 2009 at 3:50 pm
What am I missing? ‘A’ is being laid off before the end of 2009? Isn’t that in 36 days? How much can she get herself together in such a short time? Maybe this was an old letter? Guess I’m confused…..but wish her and the others the best!
There will be a lot of butt covering heading our way. Robbing Peter (those who pay their bills promptly and trying to get rid of debt) to pay Paul (those who default) so that revenue will not be lost.
Hang on! It’s going to be a bumpy ride (yes, I know it should be ‘night’…but I’m using unauthorized poetic licence)
November 25, 2009 at 4:08 pm
a bit of info about credit rates
the Bank of Canada Rate is the overnight lending rate — what hte BoC will charge banks to borrow funds from them to cover any shortfalls in their settlements.
Each bank can set their own Prime rate based on the lowest rate they will offer their best customers. Because of competition these end up being the same rate 1.75% higher then the BoC rate.
Currentl the BoC rate si 0.5% — the bank Prime rate is 1.75% on top of that = 2.25%.
The BoC has stated that they are going to hold thier rate until late Spring 2010 — but if inflation creeps up to high they will need to adjust it sooner.
The caveat is bnaks could charge thier Prime rates at any time, sooner if they want.
This is the risk to all variable rate credit producs – loans, LOCs and mortgages. The rate can change at any time, but in order to mitigate their risks banks charge higher rates on fixed rate products.
If you see a mortgage rate quoted that seems low it is probably a variable rate product, and the rate is probably only eligible for the lowest risk customers.
If you get a letter stating your rate spread (amount over Prime) is increasing check to see if you can look it in to a fixed rate you may be better off in the long run. Also pull you credit score from one of the credit score agencies, if you have a good score (rull of thumb is beacon score over 700) then you should be able to switch to another bank who could end up offering you a better rate. If your score isn’t great but you own property then you may have the equity to get a lower rate through you mortgage, but try to keep that loan separate so you can ensure that you are paying it off at the same speed.
November 25, 2009 at 4:15 pm
We are purchasing a property with a very low variable rate. I now feel scare about the rates going up. What could be a good way to know when the rates will going to increase? So we can move to fixed rate.
Thank you
November 25, 2009 at 4:50 pm
Rose:
When? EVERYBODY wants to know.
Calculate your monthly payment using the fixed 5-year rate or the average historical mortgage rate. If you can afford this higher interest, you might be ok.
November 25, 2009 at 5:38 pm
To MaryL: Sorry I wasn’t more specific, the LOC was at prime + 3% and they increased it to prime + 4%, so up 1% through no fault of my own. As for the 1.99% offer on a credit card I’ve received those as well and used them to get my current CC to match the rate. It was actually very easy, I called and said “I got offered 1.99% from someone else. I’d rather stay with you so could you please match it?” she said “yes” without hesitation and mailed it to me that day.
November 25, 2009 at 7:07 pm
I really feel for the people out there who are in difficult financial situations and it seems to be a good chunk of Canadians right now. I work for the Oil & Gas Sector and we have laid off more than a thousand employees and were still not done. I was in a department that used to have 6 people, there are 2 of us left. I don’t think this poor economy is going to end later rather than sooner. Our company is projecting another poor winter which is when we usually make the bulk of our money. I am saving like mad incase I do get laid off after another slow winter. I am also building my skills. Taking courses part time.
I try not to worry too much. I already made a “just to see” budget in case one of us gets laid off and can’t find a job and has to go on EI. We could make it without having to dip into our emergency fund.
November 25, 2009 at 11:09 pm
Thanks, Amelia.
I tried that match trick with RBC, but they wouldn’t budge. I hate opening up another credit card, and I’m not going to coast on paying it down, but I really needed the breathing space.
November 26, 2009 at 12:33 am
Gail, you answer each question so thoughtfully and carefully, with so much sincere attention to each request. Thank you so much for your hard work!
November 26, 2009 at 11:34 am
Great post Gail! Every few months I tally up all my accounts to and check how much liquid cash I have access to in case I lose my income. Your post was a good reminder to do that again. Twice in my career I was out of a job unexpectedly – the first time I managed out of sheer dumb luck. My expenses were low and I found another job quickly. The second time I had been preparing for over a year. From my own experiences I might offer a few suggestions –
In the event of a lay-off – understand your entitlement under the law. Is it two weeks pay minimum or a month? You’re also entitled to any prorated vacation pay that’s owed. If you have benefits such as a matched savings plans you are also entitled to that as well. An employer might try and pay just your wage for the two weeks owing but they also owe you anything else you might have earned from them in that two weeks –savings, pension etc.
Even if you don’t anticipate being laid off anytime soon start thinking about an emergency fund today. That could even mean keeping some lower risk money market investments in your RRSP that you could sell in a hurry if you had to. It can take a really long time to build a decent emergency fund so the sooner you start the better.
If you get severance from a lay-off I recommend looking for work right away instead of taking time off. My company’s HR coordinator once told me if he’s considering identical resumes he’ll interview the person who has been out of work for less time. When I asked why – he told me that in his opinion a company will keep a better employee for as long as they can and let go of a worse employee first. I don’t necessarily agree but it wouldn’t surprise me if other HR people feel the same way.
Just my two cents!
November 27, 2009 at 11:43 pm
Taking responsibility of your debt and taking ownership on paying it down is huge. I’ve stopped using credit cards, transferred all outstanding balances to my line of credit (lower rate) and am working hard to pay it down. Christmas will be pretty slim pickings this year, but so be it. At least I will be with my family. No more Christmas on credit cards. What a feeling of liberation to use cash for all purchases I make. I still have debt but at least I’ve stopped digging. As for savings, I put what I can into RRSP’s so that I get a tax break. My refund will go towards my debt and seeing that paid down will be my reward for diligence with my finances throughout the year. I’m excited about my plan to go to work for me and not just so I can make my credit payments.
December 14, 2009 at 1:09 pm
1. Cash Making Opportunities – The Beginning The working life is already tough enough, but the worries of being out of work was even tougher. The unsecured working environment have prompted me to search the internet for an alternative source of extra income so that I could learn how to Make Money Work for me and be Financially Independent. I listed down a number of Free Internet Business Opportunity Ideas while researching ways how people earn money online while working-from-home…….
http://www.onlineuniversalwork.com
March 13, 2010 at 10:14 pm
Love that calculator link Marie posted! Thanks!