Why Rates Go Up Or Down

There has been a lot of talk in the media about the effects of rising interest rates and what they will do the economy.  Some say it is a sign of growth, others say it will harm growth and kill the middle income Canadian family.  Let's start off with some basic facts about interest rates:

Interest is the cost of borrowing or the return for lending money, depending on if you are the borrower or the lender.  The rates at which lenders are willing to lend at are determined by risk, lending competition, and the desired rate of return.  The general rates at which borrowers borrow money at are determined by almost the same things; risk, lending competition, and the forecast rate of return.

Risk -  If risk is considered high, than rates increase.  There is a lot that goes into high level risk assessment some of them working against or with each other: the state of the economy (federal and international), inflation, Central Bank intervention, and the supply and demand for money.

Credit Card Can Be Like Fire

Using a credit card is very similar to using fire:  using and controlling it can be incredibly beneficial to you, but let it get out of hand and you face a disaster.

We are seeing many people trying to clear up their most expensive debt, the vast majority of which comes from credit cards.  People get into a lot of trouble by not understanding what credit cards do and how they work. The following are 5 simple facts about credit cards.

1.  High Interest Rates - They charge higher interest than bank loans because they are easy to acquire, and the credit card companies don't have your house or vehicle as collateral.  In order to make up for this increased risk of no collateral, they charge higher interest rates.  The standard card today charges around 18.9%, with some store cards charging as much as 28%.  There are lower rate cards around, but the low rate is usually an introductory offer and increases to regular rates after 6 months or a year.  A good credit bureau score can get you a better rate.

The Story of 4 Little Pigs

Once upon a time there were four little pigs, brothers all, who decided to head out into the world and build their own homes.

The first little pig didn't want to spend much time or money on his house as there were many more enjoyable activities he could be doing.  He hastily built a frame, found some straw and hay in a nearby field, and put it all together one morning before heading out for a round of golf with his buddies and then an all-nighter playing Pinkeneye 007 on his porkstation 3.  He laughed as he walked by his brothers' yards and saw how hard they were working on their homes. 

The second little pig didn't want to spend any money on his house as he wanted to save as much he could for retirement.  He was afraid that he might have to live in a pig pen if he didn't have enough money saved for his senior years, so he never spent anything extra.  He didn't have any experience building a house, but he found some free plans at the local library, gathered the sticks from discard bins at local wood yards, and found some used twine at a local post office.  He spent several days putting the house together, an activity made more difficult because so many of the sticks were crooked and the twine often broke.  When he was done he went to Cost Club to eat the free samples as a reward for how little his house cost him.  He shook his sadly as he walked by his brothers still building their homes, knowing that they had spent more money than he had, but he felt sorry for them wasting all that money on their houses with retirement only a few decades away.

Good Financial Articles

There have been some great articles written in various newspapers, magazines and on blogs over the past few weeks.  The following are a few that I think our readers might be interested in, including an article we posted here last year:

Investments too good to be true - RCU Speak Blog

Joint bank accounts are increasingly being used to defraud seniors and effectively rewrite wills - Macleans.ca

Protect yourself from debit and credit card fraud - Financialpost.com

Make money from a lottery?  Don't be a fool - Globeandmail.com

What is the cheapest thing you've ever done? -  Million Dollar Journey Blog

Enjoy yourselves this weekend, and keep your money safe.  Jerry