September 5, 2017

Is this even legal?

Yes, it is perfectly legal and sadly it is common practice.  Credit card issuers borrow money from central banks at overnight rates that can be less than 1% then lend the same money out at rates ranging from 7% all the way up to over 30%.

But what if the debtor is at retirement age (or nearing retirement) faced with a fixed income of around $1,200 a month – which is about $800 less than the poverty line (in Canada the government doesn’t like the term “poverty” so they use the term “LICO”)? 

With such low income, debtors may only afford to make the minimum monthly payment of say $200 and if they read the fine print on the statement issued by the credit card lender they would know that it will only take 114 years to pay the balance off.

If the debtor is already in their sixties it is doubtful that all the exercise and vitamins they could get would help them to live long enough to pay the balance off!   They would be over 170 years old by the time that balance was paid out.

With an increasing percentage of our population at or nearing retirement age, was this issue foreseeable by lenders?

Well known demographer, David Foote’s book Boom, Bust & Echo projected the inevitable transfer of trillions of dollars’ worth of inheritances as dying middle class boomers pass on their wealth.  In all likelihood lenders are seeing this transfer of wealth as the key to recovery.  In theory there ought to be sufficient funds from insurance policy payouts to settle the estate’s obligations.

But did they get it wrong?  Time will tell! 

There has been a steady decline in incomes since 1970 and an unprecedented increase in the proliferation of credit.  Residential mortgages in Canada have increased tremendously as people clamber to consolidate high interest debt in order to free up access to more credit.  Stock values have soared and crashed leaving many low level investors with significant loses.

What does all of this mean for the economy?  Who knows?  We are certainly not qualified to make any accurate predictions – what we do see is an increasing number of older Canadians, whether result of demographics or otherwise, finding themselves in a pickle.  Many of them have spent whatever assets they did have servicing debt.