MBNA Canada Bank mailed notices to credit card holders last week, notifying them that the country's No. 1 issuer of MasterCard will be changing the way it calculates minimum monthly payments. Other card companies are doing the same, in accordance with new federal regulations aimed at greater transparency for consumers.
As an example, MBNA cited an account balance that would have required a minimum payment of $185 in the past; as of August, that required payment will rise to $307, an increase of 66 per cent. A higher payment would reduce interest costs, MBNA noted, adding that it would also "help you pay off your balance faster."
We now have detected yet another coughing canary in the exemplary Canadian coal mine. Exploiting low interest rates, Canadian households have taken on record personal debt ($1.4-trillion) - more than doubling it in the past decade to now equalling more than $40,000 for every man, woman and child in the country. This is the highest household debt in 20 of the most advanced economies of the Western democracies. More ominously, however inevitably, the number of Canadian households filing for bankruptcy (or taking alternative emergency measures) has also set a record. By year's end 2009, more than 150,000 families were economic wrecks (up by 30,000 families from year's end 2008).
Household debt includes mortgages, bank loans and credit cards. On the country's huge increase in mortgage debt, the relevant experts are divided: On one hand, homeowners are apparently comfortable with it; on the other hand, Bank of Canada Governor Mark Carney not so much. As always, time will tell.
Credit card debt is another matter altogether. The number of credit cards written off as bad loans - on an industry-wide basis - fell marginally in April (from 6.9 per cent to 6.8 per cent). The optimism generated by this modest good news was, as Report on Business's Andrew Willis noted last week, a factor in the Royal Bank of Canada's off-loading of $1.2-billion in credit card debt to presumably astute investors.
But according to Deloitte Canada, in an April report, the credit card industry has averted calamity by the skin of its teeth. The industry, the accounting company said, "has been transformed from one of the most profitable areas of lending to one of the least."
The industry's narrow escape, Deloitte said, means that things will have to change - from strategic revision of business practices and operating models - to exits, by some companies, from the business. Deloitte attributed the crisis to a "perfect storm" of causes: "record net losses driven by increased debt and rising consumer bankruptcies, [which have]occurred at a time of increased government regulation."
Canadians hold 72 million credit cards and 37 million debit cards. Credit card debt stands at $72-billion. How are card holders doing in making their minimum monthly payment? From year's end 2008 through year's end 2009, the number of delinquent credit card holders (with payments in arrears by 90 days) increased by 50 per cent. These tardy card holders won't all default, of course; but, assuming that MBNA's higher-payments strategy extends through the industry, more of them certainly would. On the margin - and millions of Canadians live close to it - people who have trouble with a payment of $185 will have more trouble with a payment of $307.
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It isn't only consumers with accumulated credit card debt who need to take note of credit card companies' move away from the traditional easy-money approach to unsecured lending. Mr. Carney might take note, too. Higher monthly credit card payments are the economic equivalent of a broker's higher margin requirements. It is an economic tightening that puts a brake on economic transactions. From Mr. Carney's perspective, it's another stubborn signal of deflation, because it's inherently deflationary to curtail lending.
Banks make money in two ways: by charging fees and by collecting interest. In its letter to card holders, MBNA notes that the raising of the minimum monthly payment would decrease the amount of interest it collects. The manoeuvre is also defensive; in effect, it shifts the risk from itself to its customers.
There's more of this sort of thing to come in the next few months. In July, Ontario and British Columbia introduce a wide range of (HST) tax increases that must be paid, at point of purchase, from people's disposable personal incomes. Other provinces are raising a range of other taxes. As the conservative think tank Fraser Institute noted last month, the average Canadian household already pays more in taxes than it pays for food, clothing and housing combined. Alas, the Canadian household - or, at least, the Canadian private sector, working-class household - is pretty much a spent force.
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