Rob Carrick Globe and Mail Jan 24 2013 (please see my comments at the end)
Interest rates are going up.
The Bank of Canada left its trendsetting overnight rate alone on Wednesday and made it clear borrowing costs won’t increase any time soon.
But that news presents a false picture of what’s happening with the rates some people pay when they borrow money.
Selectively and quietly, the big banks have been cranking rates higher for credit line and credit card customers with a less than sterling record in managing their debts. It’s all part of a growing trend to tie the interest rates charged on loans more closely to the client’s credit history.
Historically low interest rates are the one legitimate excuse for this country’s household debt mountain.
But it’s now clear that not everyone benefits from low rates. If you’re not sure what your borrowing costs are, find out immediately.
There is a business case for banks charging some people more to borrow. The higher the risk of default, the higher the rate should be to compensate the lender for the risk being assumed.
But basing loan and credit card rates on creditworthiness also puts more pressure on our most vulnerable borrowers. Yes, these people bought trouble by spending more than they can handle. But charging them higher rates just compounds their problems.
“We know the prime rate has been low, and that the forecast has been that if interest rates go up, people will be in more trouble,” said Patricia White, executive director at the non-profit agency Credit Counselling Canada. “I suspect the same thing is going to occur if financial institutions started charging more for products.”
Toronto-Dominion Bank is just now sending letters to customers of its Emerald low-rate Visa card that announce higher and lower rates for some, and no changes for others. Note: This is a card for people who regularly carry a balance and want to avoid the usual credit card rate of 19.99 per cent. On its website, TD says the new range for the Emerald low-rate card will range from prime plus 1.5 percentage points to prime plus 12.75 points, compared to prime plus 1.75 to prime plus 9.75 now.
The bank said in an e-mail response to questions that the changes were made on what it calls a “risk-based” approach. “The higher the credit rating a customer has, the better their chances of seeing their rate decrease or remain the same.”
Canadian Imperial Bank of Commerce gave notice in the fall that it would raise rates on unsecured lines of credit for a small number of clients. In a copy of a notice forwarded to me by a reader, the rate was to rise to prime plus 6.25 from prime plus 4.25.
“We review our rates on an ongoing basis to ensure the pricing is appropriate,” CIBC said in an e-mailed response to a query. “Client risk profiles and other factors are used to determine pricing.”
CIBC’s rule with unsecured credit lines is that you pay the higher of $60 a month or 3 per cent of your balance. Your payments might not change if your interest rate went up, but the pace at which you knocked down the amount you owe would slow because of the extra interest costs.
TD adjusted unsecured line of credit rates a year ago and in 2009. In the most recent round, 40 per cent of affected clients saw rates decrease and 60 per cent saw an increase. A TD letter sent in by a reader showed an increase of 3.75 percentage points over the old rate. The bank said credit line rate adjustments were made according to a client’s credit situation and his or her relationship with the bank as it relates to loans and investments held.
If you receive a notice from your bank about an increase in your borrowing costs, take it as an indication that your credit score needs work. Verify your credit file is in good order by requesting a copy, and then get to work cleaning it up. Factors that hurt your record include:
-using more than 35 per cent of your available credit;
-multiple inquiries about setting up new credit;
-reliance on a single borrowing vehicle, say a credit card.
The Bank of Canada has made it clear that low rates will be with us a while longer, but there’s some fine print on this outlook. It only applies to people who manage their borrowing well.
Rates will be going up. Let me know if you would like a consultation…and if you want to know how to make your mortgage tax deductible, let me know.