Credit cards, Line of credit and your bank

Signs of Red flags

I had a sit down with one of the bank adviser recently and  I have to say that I wasn’t impressed. People say that Canadian banks are safe, because they have the highest tier one reserve ration, but I am having some doubts after the talk. A high reserve ratio will still get decimated if the lending standards are crap. The arguments that the adviser used were also misleading based on my opinion. Or rather, a more politically correct way of saying it: “They leave out certain details so that we don’t make the wrong choice out of fear.” For some that is true, but as a principle when I advice my friends, I always let them know what the worst case scenario is before helping them through something risky.”

I guess I will start with little annoyances and what you will likely face when you talk to an adviser today before going into the most important topic. These are things little things that I noticed which werent’ there before when the times are good.

The advisers are there to sell

The biggest issue I have with the bank is their desire to sell me disability insurance on every product I have with them. Mentioning how easily I can be disabled by simply slipping on ice is a tactic of fear and an exercise that insults me in my skills balance skill. The reason is pretty simple. If you are not 40 and above, the chances of you accessing that insurance is slim. Your bones are strong and will not break from simple falls like that. Fear tactic is strike one, I usually give them 3 choices before completing writing them off from my thought. They managed to do that with the conversation that dragged on.

The disability insurance

I probed on and found out that the insurance will not kick in until after you’ve been disabled for 2 months (from adviser) and once the 2 year limit is up, you have to pay them back the 2 years of missed payments. So this is just a delayed payment option in which you have to pay a premium of 2.75% on whatever loan you have (Note, source uncertain, to be verified with an official document). First of all, what kind of injury needs 2 or more months to heal that isn’t a life altering one? Second, what kind of insurance requires the person to pay back?

The condescending attitude

To get the line of credit open, I had to sit there and let the adviser scrutinize all my accounts. RRSP, Credit cards, Line of credits mortgages etc. Thank god my broker is not linked to them. I do not want them to see my investments. I will now hide more of my money with my brokers and create more redundancies after this incident. The whole time we were doing this, the adviser was criticizing everything. Saying that it is not wise to have different products with different banks, that I have too many credit card open and my debt to equity ratio is too high. To which I promptly replied with: “WHAT!”.

“As far as I am concerned, I have zero debt beside the monthly credit card spending on food gas and maintenance, unless you are saying that my mortgage is causing the high debt to equity ratio. At which point I agree, I should get rid of my mortgage with you guys.” This I will get to in the next section.

I can understand their desire to keep me within their bank. However, the reality is, I do not trust that none of the Canadian banks will fail. There are too much uncertainties to be passive and not prepare for that eventuality, which is why I made the decision to spread to different banks. It is also the prelude to my future arrangment when my assets exceed $1 million. At this point, the adviser countered with the fact that all the accounts are insured with the CDIC and CIPF to which I properly countered with: “How much fund is in those insurance entities?” I did not get an answer. Either the person doesn’t know, or knows that the answer is unsatisfactory. For those of you interested, a couple hundred million (Approx 300mil if my memory serves me correctly). So in the event of catastrophic failure, it will not be sufficient to cover one client who has a billion dollar in cash. We are seeing the US equivalent of CDIC, the FDIC losing fund  and needing government aid, I am not going to take a chance andd believe that the CDIC will not suffer the same fate.

The debt to equity ratio

Despite the attitude, I learned a lot about credit card and credit score from the person. Apparently, the debt to equity ratio is measured based on the total credit approved vs my equities. Meaning that even if I don’t use my credit cards, the full amount is considred when calculating the chance of my bankruptcy. Now, before this revelation, I had always thought that I can get so much credit because I have no debt and have proven to be great with managing money. I have only missed 2 credit card payments in my whole life, one of them because the banks don’t perform transactions during holidays. The other one… well, I forgot why.

This lead me to question the bank’s lending practice. If I am able to get so much credit when they evaluate me assuming that I have full debt on all my credit cards, then this is too much. At the moment of speaking, I can amass a total of 50K in one day if I had pulled all my credit. I will not be able to pay the monthly interest rate. This made me conclude that the Canadian banks are desperate enough to veer towards bad lending practices.

I will attempt to get an RRSP line of credit in a few months. At which time, I will re-evaluate their desperation and lending practices.

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