Running up that bill

Good morning. Ever feel bad about a mistake you made at work? Well, at least you're not one of the government officials who made a miscalculation that ended up draining the Colorado River.

In the wise words of Hannah Montana (or is it Miley Cyrus?): "Everybody makes mistakes, everybody has those days."

In this edition:📉 Tech meltdown💳 Swipin' that plastic

— Vindhya Kolluru, Editor

ECONOMY

What's going on with the tech market?

It seems like every other week another company announces layoffs as fears of a looming recession only continue to grow. E-commerce giant Shopify, investment firm Wealthsimple and social media management platform Hootsuite are just a few of the Canadian tech companies that have laid off workers in the last quarter, as an economic downturn wreaks havoc on the valuations of these companies.

Why it’s happening: At the onset of the pandemic, central banks worldwide (including the Bank of Canada) slashed interest rates to encourage borrowing. The same rock-bottom interest rates that fuelled the real estate market boom also encouraged investors to make riskier bets on up-and-coming tech startups with lofty growth goals. Wealthsimple, for instance, raised $750 million from investors when interest rates were still love.

But now, rising interest rates and a broad economic downturn are making it all go south.

• Tech companies have been especially hard-hit by the market sell-off since they are particularly sensitive to interest rate hikes. According to the Globe and Mail, "the higher rates go, the lower the current value investors ascribe to the companies’ expected future cash flows."

In many cases, the supercharged growth documented by companies during the pandemic didn't last very long. For example, most businesses set up online stores through merchants such as Shopify, but now use them significantly less or have closed their online platform altogether as in-person shopping resumes. As a result, Shopify laid off 10% of its workforce to offset the changes in shopping and spending. (In an announcement, CEO Tobi Lutke admitted the bad bet on e-commerce was his fault.)

• The e-commerce behemoth isn’t the only company to cut staff: In an effort to cut down on costs, Wealthsimple laid off 13% of its workforce, fintech financier Clearco 25% and Hootsuite 30%.

Zoom out: Experts fear that companies that don't have a clear path to long-term profitability will continue to struggle. Some in the sector think things will smooth out over the next couple of quarters, while others believe this is just the beginning of a larger tech downturn globally. (We really could use a 🔮 right about now.)

What this means for your portfolio: The meltdown in private markets started with public companies. The S&P 500, a weighted index of the biggest American companies, was up almost 30% in December 2021, an increase that was largely driven by high-performing tech stocks. But in June, our portfolios took a hit when rising interest rates pushed the S&P 500 to its lowest level since March 2021. If you are getting nervous about investing in tech, it is probably because someone told you to be more cautious. But we're here to remind you that market fluctuations are indeed normal, no matter how painful it might feel right now.

— Hannah Rosen

On our radar

• Through its second Women in Technology fund, the Business Development Bank of Canada has committed $500 million toward supporting women entrepreneurs and investors across Canada.

• Julie Kalinowski, the CEO of Toronto-based dress rental business The Fitzroy, says that while the rental clothing market is currently challenging, she is optimistic that the return to in-person events (like weddings and formals) will improve sales at her company.

• Janet Bannister, one of the most prominent women VC investors in Canada, has left Montreal-based Real Ventures as the firm's managing partner. Bannister had first joined the firm in 2014.

THE 411

What to know about running up that credit card bill

Wait, is it 'hill' or 'bill'? Anyway. Soaring inflation is forcing more Canadians to swipe their credit cards, racking up debt in the process. Recently, credit reporting agency Equifax found the average Canadian carries ~$21,000 in debt, not including mortgages.

• Along with rising inflation, pent-up spending demand from the pandemic (see: “revenge travel”) and the convenience of “Buy Now, Pay Later” options have made it easy to throw money on a cute new sweater, no matter how much it's out of our budget.

But first: Before we dive into how you can tackle credit card debt, let’s get some basics out of the way. There can be a lot of confusion over what to pay at the end of the month when your credit card statement shows up in the mail (or email). “Some may think the minimum payment as outlined on a bill is what should be paid, but that is just some of the interest that you owe,” says Lisa Hannam, the executive editor of MoneySense.ca.

• This practice will affect your credit score (a number between 300 and 900 based on things like how much debt you have and repayment history.) By carrying over your balance, interest charges can accumulate and compound interest can add to your debt load, which will be documented on your credit report (which, let’s admit, is the horrible adult version of a report card from school 🤮).

• Hannam says it’s best practice to pay the statement balance every month before the due date or have a plan to tackle it, as the interest rate on most credit cards in Canada averages at 20%.

The next thing to pay attention to is your credit utilization score, the amount of debt compared to your credit.

• Hannam offers an example: Say, across all your credit cards and lines of credit, you have $25,000 in credit and $6,000 in debt. When you divide debt by your total credit, you get 0.24 or expressed as a percentage, 24%, which is your credit utilization ratio. The lower the ratio, the better. The general rule of thumb is to keep your credit utilization under 30%. Going over that might signal to credit bureaus that you’re over-dependent on credit or a risky borrower.

It would seem that increasing your credit limit could improve your credit utilization ratio, but that can have downsides. According to Hannam, each request to increase your credit limit subjects you to a credit check, which will affect your credit score. Having multiple hard credit checks within a short period of time can seriously hurt your credit score, so this should be considered when deciding if requesting to increase your limit is really necessary, she says.

Getting rid of debt: Hannam says there are many strategies to pay off credit card debt. With interest rates so high on credit cards, you will want to look for options with lower interest rates, such as a line of credit. (The average interest rate on a line of credit is much lower, ranging from 4-7%). Ultimately, how you plan to tackle credit card debt will depend on your personal financial situation.

The bottom line: Credit cards are a financial tool that can help you build a healthy credit score, a requirement for big-ticket purchases like a car or home. You can also use them to save money on purchases through rewards and cashback offers. While it's also important to keep your credit utilization ratio in check and pay your statement balance in full by the due date, the messy economy is no doubt making that harder to do than usual.

— Harsimran Kaur Garcha

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