Debt Roulette at El Casino del Banco – the house always wins:

January 25, 2023

Debt Roulette is a losing game for the players, the odds are always stacked in favour of the house (banks).  Quebec is the only province, I am aware of, that has taken meaningful steps to start evening the odds.

Basic Rules – you need to understand these.

Bank employees are not your friends, they are working for the bank.  Bank employees get bonuses for getting you deeper into debt.  Few bank employees are “expert” in their fields most are trained to functional levels within their department.  Always obtain independent legal or financial advice.

The CBC has broadcast several exposes on the topic of bank employees fudging numbers to qualify people for debt they ought not have and dealing with the (debt) sales targets and rewards given for meeting goals.  As for the qualifications, many bank employees complete internal, online, courses and are able to print out their certificates upon completion.  Usually these certificates are valid only within that specific working environment and are not transferable.

Credit Cards need to be regulated.

As mentioned above, Quebec is the only jurisdiction to have taken regulation of credit cards seriously.  Quebec introduce legislation requiring that minimum monthly payments on credit cards should be at least 5% of the outstanding balance.  This is a huge step forward in consumer protection from bank exploitation.  Currently many bank issued credit cards are asking for minimum monthly payments of less than one tenth of one percent – see the picture above – leading to perpetual debt.

In the good old days, credit cards had to revolve (get paid off in full) periodically or user privileges were suspended.  In such an instance, the bank may have either asked for full payment or converted the balance to a term loan.  Minimum monthly payments used to be over 3% but that presented several problems for the banks, the rate of default would be higher, because consumers couldn’t afford the payments, and banks would reach market saturation more quickly.  Banks also know, very well, that consumers use debt to pay for debt in order to avoid default, so they developed a strategy of increasing credit limits to stave off default.  Fortunately, the government did intervene by requiring that the consumer authorize increases, which replaced the bank policy of automatically increasing limits

Mortgages are for houses – not vacations.

Banks actively encourage people to inappropriately use credit facilities, particularly mortgages.  A mortgage is the largest single debt that most people will ever have, it serves one proper purpose – buying a house.  Your house is not an ATM, as many people are starting to realize.  Currently in Canada many consumer mortgages exceed the value of the properties they are registered against.  If anyone blames the lockdowns or some other exogenous factors they are misleading you – this was entirely predictable and completely avoidable.

Interest rates were held down by the Bank of Canada at the behest of the government.  Low interest rates, particularly on mortgages led to extremely high housing prices and the doubling of Canadian consumer debt loads.  More Canadians than ever in history are registered owners of real property, ironically owning less and mortgaging more of the values of those properties.  In the good old days people had “mortgage burning parties” – the amortization may have been for 25 years, but the mortgage was paid in full within 15.  Now, banks gazunder hapless mortgagors every few years, extending the amortization out again and again into perpetuity.  Many Canadians were suckered into increasing mortgages based on artificial housing values all of which was hinged on the lowest interest rates in Canadian history.  Those 1.4% rates from past few years are now 6% and the payments have exploded to untenable levels.

Overdrafts and lines of credit.

Both overdrafts and lines of credit are attached to chequing accounts to facilitate a smooth overflow, as with everything banks do there are fees associated with transactions.  Overdrafts, like all other debt “products” are traps for consumers, once you find yourself sliding into overdraft on a regular basis you will tend to stay in it for longer periods.  Lines of credit attached to bank accounts are far worse than simple overdrafts because they will show up on a separate statement, not your bank statement, and are therefore somewhat out of sight.

Possibly, the worst of all debts are HELOCS (Home Equity Lines of Credit) – sometimes referred to as Hell Locks, because they lock consumers’ homes into the product leaving no choice but to maintain payments or lose the house.  HELOCS have little advantage for consumers except the illusion of reduced monthly payments and cashflow benefits.  The reality is that a consumer who has included all of their bank borrowing into a HELOC (another form of which is the “Total Equity Plan”) cannot take advantage of a Proposal or Bankruptcy without losing their home.

Proposal your way out of debt.

You can proposal your way out of debt rather than reconsolidating ad nauseum.  Every time you consolidate your debt you increase it.  You may improve your month to month cashflow, but in the longer term you will keep paying debt.  A proposal can help you reduce all of your unsecured debts to one manageable monthly payment and allow you to keep your assets.  If you got this far into this blog, call the office at 519-646-2222 to explore your options.

Bankers at work.

A couple switched banks, and where they had a VISA, it was replaced with a MC, the line of credit was transferred quid pro quo as was the overdraft protection on the checking account.  They were asked to meet with their new “account manager” who wanted to try to sell them on more debt.  He tried to advise them of the benefits, as perceived by the bank sales department, of using up available debt.  He correctly observed they hardly used the credit card and very rarely used the line of credit for anything, and only occasionally dipped into the overdraft.

He advised the couple to max out the line of credit, suggesting it would be good for them to do so.  They asked how that might be useful, the bank account manager responded “well, for one thing you could go on a vacation, or buy new appliances for the home, and as you make regular payments that will help your credit rating increase and we can then make more credit available for you”.  

A financial adviser at the bank was asked to split a sum of money between three equity funds, with half of the deposit going to one fund and one quarter each to the other two.  The adviser suggested the client should avoid the larger of the three funds, “because it’s value had just dropped” to which the client responded “in that case put three quarters of the money into that fund and split the remaining quarter between the other two funds”.  He responded, “but that fund has dropped in value” the client said “exactly, so I will benefit from the uptick when it rebounds”. 

A man was being served by a teller when the supervisor approached and asked, “how long have you been in Canada sir?” her assumption based solely on his accent and skin colour.  The man responded, “three years”, she said “oh good, so you qualify for our newcomers programme, we can give you free banking services and a $5,000 limit credit card, without a credit check”.

It requires very little thought to see how the dealer has all the advantages when you play debt roulette at El Casino del Bancos (“the Casino of the Banks).