Me and My Money

Banking Fees

Posted November 25, 2011
Originally Published November 8, 2010

How I saved $2,000 in one week ...

I saved almost $2,000 in a single week. And I did it, nearly 10 years ago, by taking a hatchet to bank fees. But first I had to get myself -- with the help of my friendly neighborhood banker -- into some financial trouble.

To understand how it all came about you have to know a little about my business -- primarily writing non-fiction books (with my husband David Cruise) and newspaper columns leavened by stints in television. With books we sign a contract, get a chunk up front, another chunk on delivery of the manuscript and the remainder split between hardcover and softcover publication.

There can be as long as four years between the first cheque and the last. And that’s where a $30,000 credit line came in. As with most small businesses, that credit line was our lifeblood.

Being an author, broadcaster and journalist sounds glamorous (and sometimes it is!), but essentially we were operating a small, unincorporated business. As every entrepreneur knows, one goal is to minimize taxes. Of course, when you do that, you also minimize your net income, which the bank relies on for lending purposes.

Net income, when you run your own show, is not an accurate reflection of your financial health. But banks have never been small business friendly and they have long treated income from unincorporated small businesses in the same way as employee wages.

So it’s a catch 22; a small business owner may have a low tax bill because of deductible expenses and capital cost allowances, but the bank won’t lend money because said small business doesn’t have a sufficiently large net income.

When it came time to renew our a decade-old mortgage, we were told lending policies had been “updated” after the mid-1990s recession -- sound familiar? At the time, the prime rate was nearly 7 per cent, versus 3 per cent today.

We had been dealing with the same bank for twenty years, including mortgages on three different houses. At the time our mortgage was 50 per cent of the value of the house and our credit rating was spotless.

The loans officer grandly told us that he could just squeak us in under the mortgage guidelines for renewal but our $30,000 unsecured credit line would have to go. We gulped when we heard that but a big cheque had just arrived and it was mercifully paid off.

But our business continued as always. Big cheques and big gaps between them. Essentially, by denying the credit line, the bank forced us to off load what once been covered by our credit line to our overdrafts and eventually on to our credit cards.

Interestingly, the bank which had refused to continue our credit line, unilaterally increased our overdraft and credit card limits to ... you guessed it to, roughly $30,000.

Nothing had really changed, but where once we had a low interest credit line, our cash flow borrowing suddenly attracted fees and higher overdraft interest on our bank accounts. On top of that we found our even more expensive credit card debt growing.

Then we got mad as hell and decided not to take it any more. When overdraft, account and credit card fees and interest hit $2,000 annually, we pulled the plug and moved everything to President's Choice Financial, a no frills bank with kiosks in Loblaw stores. It advertised no fees and higher interest on deposits.

As mentioned, we cut out $2,000 in unnecessary fees and interest in about a week.

Why doesn’t everyone do this, we thought? Well, because it is a pain. Forms, forms and more forms, plus tax returns and various other documents. But, as a bonus, PC Financial gave us a $16,000 credit line at lower rate than our old one.

Since then I’ve analyzed the financial situation of many individuals and families. Almost all could save hundreds, at least, annually in bank fees.

One caveat, the no frillsvirtual banks often aren’t as good as regular banks at dealing with anything even slightly out of the ordinary. PC Financial, for instance, doesn’t offer a U.S dollar account.

Today there are many more banking options than there were 10 years ago, including the
virtual banks, banks attached to stores and credit unions. The trick is to carefully examine your banking needs and compare them to the institution and their costs.

To help you pick a bank that fits go to the Financial Consumer Agency of Canada www.fcac-acfc.gc.ca and you’ll see the Bank Account Selector Tool link on the home page. You do need to thoroughly understand your banking needs in order to make the most of the selector process.

All of the federally regulated financial institutions are included on the site but not credit unions which fall under provincial jurisdiction.

We diverted that $2,000 saved annually to our RRSPs and it has turned into $26,400. If you take into account the taxes saved with the RRSP contributions and the higher interest earned at PC Financial it amounts to almost $40,000. Not bad for a week’s work.

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