Because few of them earn income any more, older Canadians are more vulnerable to the vagaries of interest rates than those still in the workforce. Even though interest rates are near historical lows, credit cards still charge hefty – some would use the term exorbitant – rates of interest.
For seniors, this situation leaves them in a situation of “heads they win, tails they lose.” As investors holding bonds or cash, they receive paltry rates of interest – leaving them vulnerable to sales pitches for riskier stocks or equity products. Low rates also mean it’s a poor time to convert capital to annuities. What was the income trust debacle if not a desperate reach for yield in a low-rate environment?
But on the debt side, seniors do not benefit from the same low interest rates. Bank credit cards still charge hefty rates in the high double digits and department store cards more than 20%. And as a recent series of articles in the National Post demonstrated, Canada’s “payday” loan shops charge more for short-term loans than their counterparts in the United States.
Fortunately, the Department of Finance has started to address the issue of credit card practices. Late in May, Minister James Flaherty released new proposals for rules that would limit business practices that are not beneficial to consumers. It proposes to mandate an effective minimum 21-day, interest-free grace period on all new credit card purchases when a customer pays the outstanding balance in full. And it would lower interest costs by mandating allocations of payments in favour of the consumer. It would also prohibit over-the-limit fees solely arising from holds placed by merchants.
Almost 25 million Canadians have credit cards, which suggests virtually all adults have at least one. Because so many seniors struggle on fixed incomes, it’s imperative that they take advantage of today’s low interest rates by consolidating any loans, endeavouring to eliminate any outstanding credit card debts with a line of credit charging much less in interest. It may even be advantageous to refinance mortgages, although I think it’s best to enter retirement with no debts at all, including mortgage debt.
As the certified financial planner character says in my financial novel, Findependence Day, “the foundation of financial independence is a paid-for home.” If you believe that, you wouldn’t want to weaken that foundation with such desperate measures as reverse mortgages, although it may be a last resort for those with no heirs.
I always say the best mortgage is no mortgage at all. Seniors may want to hang on to one credit card for emergency purposes and perhaps convenience, but should keep in mind that no investment can beat the guaranteed high after-tax returns of paying off debt.