Correction: An earlier version of this story incorrectly stated that the federal government's new credit card regulations that take effect Wednesday are voluntary. They are mandatory. That sentence has been removed. Also, a quote by Finance Minister Jim Flaherty was a reference to the credit/debit card code of conduct, not the incoming credit card rules. That quote has also been removed.
Tough new rules that take a bite out of the Canadian credit card industry's profits are sparking concern that consumers could see a rise in rates similar to those hitting American card users.
On a conference call with analysts last week, Sonia Baxendale, president of CIBC Retail Markets, said the bank, which is the country's leading credit card issuer, has been "working on a number of product changes" to offset the anticipated costs of new credit card regulations. CIBC had no further comment as to what those changes would entail.
Research firm Synovate reports that U.S. credit card companies have pushed their interest rates to their highest level in nine years following the implementation of the U.S. Credit Card Accountability Responsibility and Disclosure Act, which took effect last week. The act limits banks' ability to charge penalty fees to credit card customers and come on top of rule changes earlier this year that restrict issuers' ability to adjust rates. The spread between the prime rate and the average credit card interest rate in the United States is now the largest it has been in 22 years.
In Canada, three new regulations take effect on Wednesday that will bolster changes made earlier this year. First, card issuers will be required to offer borrowers a minimum 21-day grace period, during which they won't have to pay interest on new credit card purchases as long as they pay off their balance by the due date. Previously, grace periods varied and interest could be charged from the date of purchase on new items if the card holder had not paid last month's bill in full.
Second, when customers make payments above the minimum amount, they must now be applied to the balance with the highest interest rate first, or proportionally to all transactions. Previously, card issuers could apply payments made above the minimum amount however they saw fit.
Third, credit card statements will have greater transparency and will have to show how long it will take to pay off a balance if only the minimum payments are made. They will also have to provide advance notice of any increases to fixed interest rates.
These regulations follow several changes made in January, which included requirements for information disclosure boxes on statements, the need to obtain customer consent for credit limit increases, an end to over-the-limit fees caused by retailer holds, and regulations governing debt collectors.
Kelvin Mangaroo, president of RateSupermarket.ca, says the regulations are a good first step, but warns that Canadian credit card companies may follow the lead of U.S. lenders who have increased their rates.
"If these regulations go into effect and if the credit card companies are losing revenue, they will have to recoup that in some way," Mr. Mangaroo said. "So there is always the potential that we could start going down that route as well."
Terry Campbell, vice-president of policy for the Canadian Bankers Association, says it's difficult to compare Canadian credit card issuers to their American counterparts because the practises south of the border that prompted regulations there have not happened in Canada.
"I'm not able to comment on business decisions of any banks, whether they're going to lower rates or change them or change features. That is a business decision. I think it is fair to say, though, that every bank is looking at these new regulations and obviously we're going to comply, but any changes would be up to banks individually."
Visa Canada and MasterCard Canada have both indicated they support and will comply with the new regulations.
Laurie Campbell, executive director of Credit Canada, applauds the regulations and the spotlight they have placed on the costs of bad credit card habits. However, she would like to see the changes go a step further by making credit card companies increase the minimum payments they require from borrowers, forcing them to pay down their debts faster.
"Around 30 per cent of people do not pay off their credit cards each month," Ms. Campbell says. "Of that, it's hard to know who only makes the minimum payment, but it's significant enough that this is seen as a problem."
Credit Canada offers tips on how to avoid falling into credit card debt:
1. Know the terms of the card. Read the fine print. Know the interest rate, the fees and the payment schedule.
2. Be cautious about low-interest teaser rates. You might be enticed to get a new credit card because it offers a low introductory interest rate. That's all fine and well until the higher rate kicks in. Know what you will eventually be paying.
3. Calculate interest rates. Educate yourself about how debt can build up because of interest. Those $60 sandals and last week's $15 pizza delivery at 20-per-cent interest can be costly. You can calculate the true cost of your credit card debt with an online debt calculator.
4. Think about a secured credit card. If you need a credit card but wish to avoid interest rates altogether, consider getting a card that is secured by funds you have deposited with your bank. Usually a very low monthly fee is required, as well as a one-time set-up fee.
5. Set and keep a budget. This is simple: Don't charge more than you are able to pay at the end of the month. Download a monthly budget tracker to help you keep tabs on your spending.
6. Pay on time. Always try to pay off your balance. If that's not possible, pay as much as you can, or at least the minimum.
7. Don't go over your credit limit. If you spend too much, you'll incur additional fees that will put you further in debt.