Canada’s proposed credit card reforms

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.

4 comments

  1. Lior

    May 25 2009

    “Flaherty said the big banks “resisted” this particular move. “It will cost them tens of millions of dollars,” he told reporters.”

    … which I’m sure they will find other ways to recoup any lost revenue. Considering that cardholder agreements give them the right to raise interest rates at any time and increase service fees at any time and roll back reward programs at any time, you can see just how much leverage these banks have to minimize losses.

    I agree, though, that there’s too much emphasis out there about making only the minimum payment. If you carry a balance on several cards, you’ll never pay off the debt making the minimums and then utilizing what you just paid. Likewise, using one credit card to pay off another isn’t a bright idea either.

    There must be mandatory personal finance education classes in schools to teach young students how to avoid falling into this vicious cycle of having easy access to money and the consequences of not paying back in full the funds you’ve used.

    Back in the era when charge cards were used, people weren’t overwhelmed by debt as they are today. This is why I’ve always been skeptical of the figures provided by the banks and credit card companies that say 70% of Canadians pay off their credit card debt in full each month.

    Even if this figure is true, which I doubt it is, it doesn’t mean the situation is rosy. People could be living off their credit cards by paying the balance off in full every month and then utilizing what they paid off to pay for other things.

    It is an endless cycle that holds together well as long as the cardholder has sufficient income to make it happen.

    But what happens when that income is lost and the cardholder can no longer pay the debt? It’s something to think about as unemployment rises, real estate prices are continuing to head down, businesses are closing, and banks are gearing toward more write-downs.

    Every time we hear in the news about how Canadians are in much better financial shape than the Americans and how in this country things are done differently and responsibly, it’s time we ask ourselves if that overconfident sentiment is just one big illusion.

  2. Mr. Cheap

    May 25 2009

    Interesting post, thanks for spreading the news!

    I think the Canadian Bankers Association argument that it would be costly to tell customers how long it will take to pay off their bill paying the minimum is misleading. I could write a program that would calculate this in about 2 hours.

    To include this as part of the process to generate a customer’s monthly statement would be trivial.

    I think they’re just saying that because they don’t want to do it.

  3. Frances

    May 31 2009

    I agree that the minimum payment should be 5% not 3%. I would go farther and raise it gradually to maybe 8%. If people knew that they had to make a substantial payment when they go to charge something they might think twice about doing it. I also agree with Mr. Cheap that when the banks say that it would be too difficult to calculate the payoff time of a minimum payment, they are just making excuses because they don’t want to do it.

    As one who pays my credit card bill in full each month, I must say that I am bothered by the fact that I get free credit that will be paid for by those who make only a partial payment. I know that any suggestion to change that will be met by a massive tide of objection, but it would, nevertheless, be just.

  4. sandals

    Jun 13 2009

    Credit cards should have a mandatory 5% minimum payment and limits should be adjusted automatically every 6 months.

    Just because you HAD a good job making $150,000 per year doesnt mean NOW that you make $25,000 you should have the same $80,000 credit limit.