May 24 2009 by Ellen Roseman
I’m happy to see more controls on credit cards. But what Finance Minister Jim Flaherty unveiled last week were suggestions for better disclosure of credit card practices, instead of strict limits on those practices.
Take the idea that card issuers would calculate each month how long it would take you to pay off your balance if you made only minimum payments. The Canadian Bankers Association rughtly argued that this would be costly.
Why couldn’t credit card bills just come with a warning that paying the minimum amount is dangerous, giving an example or two? Who needs an individual calculation? Far better to make card issuers raise the monthly minimum (say to 5 per cent from 3 per cent now), so that your balance would get paid off more quickly if that’s all you paid.
The only thing I really like here is the insistence that you get a 21-day grace period for new purchases as soon as you pay your balance in full. That’s how all credit cards used to work, but most have changed to the U.S. system that requires you to wait two months after you pay in full to get back the grace period on new purchases.
The proposed regulations will ensure that these large banks adopt the methods currently used by Desjardins, National Bank, HSBC Bank and others so there’s also a 21-day grace period on new purchases, regardless of any balance carried forward.
Flaherty said the big banks “resisted” this particular move. “It will cost them tens of millions of dollars,” he told reporters.
This quote from a Windsor Star story says it all. Only a handful of credit card issuers still use the old method. The rest don’t want to go back, since they make too much money with the new method.
The Financial Consumer Agency tries to explain the two methods of calculating interest here. But it’s hard to explain and understand, especially with the giant flow chart at the bottom.
I’m impressed that Minister Flaherty went along with requests to ban Method 2. The credit card issuers could have gotten away with this practice for years, because it’s easy to hide. And most people don’t worry about how their interest is calculated.
But it’s fundamentally unfair to make people pay interest on new purchases even after they pay their balances in full. For this proposal alone, I thank the Tory government for clamping down on credit card greed.