Credit Card Balance Protection Insurance Costs You Even If You Pay Off Your Balance

Posted by Preet on May 2, 2010 | 5 comments

I was chatting with a friend recently who informed me that he once signed up for a balance protection offer from his credit card company. You’ve probably been offered this at some point. Someone calling on behalf of your credit card company will offer you a service that will pay your minimum payment owing every month if you lose your job, become disabled, or whatever. The cost is around $1/month per $100 owing.

What They Don’t Make Clear About Credit Card Balance Protection Insurance

I think most people would believe that, after hearing the pitch on the phone, that if they paid their balance off in full every month there would be no need for the insurance, and no cost either. Some would sign up thinking that if something DID happen between payments that caused one to be unable to generate an income, then whatever small payments owed at that time would be covered for little cost. So people who don’t carry a balance month to month might actually sign up for this offer.

Unfortunately, that’s not how it works. The cost is calculated on your average daily balance owing on your card. This means that even if you paid your card off in full every month, you would still be paying for this insurance.

Example Calculation

Let’s say that on the first day of your billing cycle you spend $1000 for automatic payments (maybe you funnel all your regular monthly payments through your credit card). Thirty days later you pay off your card in full by the payment due date. Your average daily balance is going to be $1000 x 29 days/30 days which equals $966.67. Now they will calculate your insurance premium based on this number. In this case it would be $9.67/month.

So for those who pay off their credit card in full every month and think they don’t pay credit card interest but have this “balance protection” insurance, think again. Your effective interest rate is about 12% per year (effectively). If you carry a balance and DO pay your regular interest rate on the balance owing AND you have this balance protector insurance, it’s like adding 12% to the interest rate you thought you were paying.

As an extreme example, for those who carry a credit card balance on a high interest rate card of 19.9% – you’re actually paying closer to 31.9%. Yikes!

Moral Of The Story

If you have your finances in order (i.e. you have disability insurance, emergency reserve, etc.) you’ll never need balance protection insurance.

New Firm Focusing On Reducing Currency Conversion Fees For Canadians

Posted by Preet on Feb 15, 2010 | 9 comments

Canadians can pay as much as 2.5% in currency conversion fees which are hidden in what is known as “the spread”. If you are a small business and you convert $5,000,000 per year between US dollars and the loonie, a 2.5% spread means your bank earned roughly $125,000 before costs (which I think we can all agree are not going to be close to $125,000).

A firm based in Toronto has set up shop to compete with the banks in fulfilling the currency conversion needs of customers. Their goal is simply to reduce the spread, which translates into more money in the customers’ hands at the end of the day, and a slice of the pie for the firm. They would earn less than a big bank, but it’s a business of volume and there is a big pie out there.

The President of the company is a reader of this blog and I asked him to answer a few questions to share with the readers. This is not a sponsored post, nor an endorsement – just thought it would be of interest. Here are the questions I asked, and the answers as given by Rahim Madhavji, the President of Knightsbridge Foreign Exchange Inc.:

1. Explain in a nutshell what you do.

Knightsbridge provides better than bank foreign exchange rates (and free wire transfers) to individuals (i.e. foreign property buyers, estate transfers, car/boat, and other large personal FX requirements) and small and medium sized businesses. Knightsbridge provides its clients the level of service banks provides to its largest clients (market commentary, unique understanding of FX requirements, FX rate alerts, market orders, risk management policy development, and hedging tools – ability to lock in an exchange rate today for the future). When dealing with a bank, customers often speak to a “representative” that does lending, mortgages, visa, chequing accounts, etc. All we do is foreign exchange – we have to be better than the bank – otherwise no one would use us.

2. How are you able to provide better rates than banks?

Banks have a monopoly and significant market share. As a result, they charge high currency margins. Banks don’t pay much attention to the small business banking market. Knightsbridge’s management team has strong relationships with financial institutions (Knightsbridge’s CEO is the former global co-head of RBC’s FX sales and trading group), which allows Knightsbridge to obtain superior pricing.

3. Why don’t more firms do what you do?

Currently, there are several competitors in the marketplace, especially in the UK, and there are several regional participants in the U.S. and Canada. However, due to stricter anti money laundering and terrorist financing legislation, barriers to entry for new participants are increasing. Because banks ultimately provide foreign exchange and liquidity services to all market participants, they are selective with whom they work with, and do significant diligence prior to allowing companies such as Knightsbridge to partner with them. Knightsbridge’s primary banking relationship is Bank of Montreal, and all client funds are held with BMO or other Canadian banks. Also, Knightsbridge is regulated by FINTRAC.

4. Are you as safe to deal with as a bank? Why?

Knightsbridge is a foreign exchange and payment company – as funds are received they are sent to the beneficiary. Think of PayPal, Western Union, but much better FX rates and no wire transfer fees.
Knightsbridge does not hold deposits on behalf of clients. Client funds are sent to the beneficiary, generally, by the end of the day.
Strong management team. Rob Wittmann, CEO of Knightsbridge, has over 30 years of financial services experience and is the former Global Co-Head and Managing Director of RBC’s FX Sales and Trading group.
Rahim Madhavji, President of Knightsbridge, former investment banker at RBC and worked at a $550 million private equity fund.
Michael O’Neill, Knightsbridge’s head trader, has 30 years of foreign exchange experience at global financial institutions.
Knightsbridge is registered with and regulated by FINTRAC (Financial Transactions and Reports Analysis Centre of Canada).
Knightsbridge’s primary banking and FX liquidity relationship is with the Bank of Montreal. The Bank of Montreal has conducted diligence, including reviewing Knightsbridge’s comprehensive compliance policy, prior to establishing client trust accounts, payment, and a liquidity relationship with Knightsbridge.
Knightsbridge’s works with TSX listed and private equity portfolio companies.
Knightsbridge has no bank debt.
Knightsbridge only operates on a “cleared funds” basis with clients (no settlement risk) and has policies and procedures in place to prevent fraud.
Knightsbridge does not extend credit to clients.
Knightsbridge does not take open market positions, and as a result is not exposed to market risk. All transactions are covered immediately (i.e. back-to-back). Forward contracts require margin to be posted to ensure against contract default.
Knightsbridge has developed and provided a comprehensive, risk based Anti Money Laundering and Terrorist Financing Policy Compliance Manual to our liquidity providers and banking relationships.
Knightsbridge has also developed a comprehensive business plan, which incorporates data backup and business resumption plans, as well as detailed client on boarding and transaction processing requirements.
Knightsbridge and its clients are mutually bound by the terms and conditions found in the client application form.

5. What are the smallest and largest transactions your firm handles?

Minimum of $15,000 and maximum of $40 million. Anything larger or smaller is on a case by case basis.

A Lap Of The Blogs

Posted by Preet on Feb 4, 2010 | 7 comments

If you are new to WhereDoesAllMyMoneyGo.com, every Friday I run a post called “A Lap Of The Blogs” which provides links to articles I found interesting and think that others may want to read for themselves. I also sometimes include some commentary on what’s going on in my personal life and a weekly “racing video” since my former life was in the auto-racing industry. The name “Lap of the Blogs” is in reference to “A Lap Of The Gods” which is an old video series which chronicled on-board footage of the world’s greatest F1 drivers lapping various racetracks from around the world. NOTE: you have to visit the actual website to see the embedded video – it may not appear in your email. Just click on the title of the email to see it…

I made a 24 hour commando-mission to Atlanta last weekend and the result is that I will be co-authoring a new book which we hope to have published in May. I’ll fill you in on details as we near the end of the project, but I think I will have another book in me for 2010 or early 2011 as well which will be focused on sharing some horror stories with the hopes of helping figure out what NOT to do when it comes to managing personal finances – that was inspired by Larry MacDonald – who writes a blog here.

Mentions In The Media

Financial Post Magazine: 2010 RRSP Playbook

National Post: Investors have met ‘the enemy in the mirror’

Toronto Star: Requiem for a Bay Street Titan.

From Around The Blogosphere

Dan Bortolotti has recently launched an entire blog devoted to Couch Potato Portfolios. I see it quickly becoming a very popular website.

Rob Carrick talks about Post-Traumatic Stress Investing.

Jonathan Chevreau discusses a poll which found that 20% of people hope CPP and potentially winning the lottery will be enough to fund retirement. Yikes!

Ellen Roseman says it’s time to stop the madness.

Michael James elaborates on Ellen’s thoughts.

Canadian Capitalist links to an exposé on the Rich Dad, Poor Dad seminars. A must read.

Thicken My Wallet explains why the Latte Factor doesn’t work.

Million Dollar Journey shows us how one could save 70% off their grocery bill.

Four Pillars has an interesting post on bank accounts and dating.

Big Cajun Man wants a financial GPS.

This Week’s Racing Video

Rally drivers are bonkers. This short 22 second clip shows one driver jumping half a football field during an event. Holy moly guacamole!

You are going to Interview the CEO of ING Direct Canada

Posted by Preet on Sep 14, 2009 | 22 comments

WhereDoesAllMyMoneyGo.com

Yes, you read that correctly. YOU are going to interview the President and CEO of ING Direct Canada, Peter Aceto. Well, let me explain further… I will actually be the one asking the questions, but the questions I will ask are going to come from the readers of this blog.

I would ask for you to please leave your questions as a comment on the bottom of this post. If you are reading via email or Facebook, then please click here to go the blog’s website where you will find the comment form. Not all questions will be selected for the interview (like: “Peter, what’s your shoe size?”), but I encourage you to think of something and contribute (like: “Peter, are you going to launch a no-fee chequing account to complement the no-fee savings account anytime soon?”).

Peter looks like a pretty cool guy, note how “plugged in” he is:

I’m looking forward to the interview and I’m counting on your questions, so don’t be shy! :)

Before I go, here is a video from Peter discussing unfair banking fees.