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Toronto-Dominion Bank has targeted its financially weakest customers to boost profits.

TD will start charging compound interest on all its credit cards starting in March, which means customers could end up paying interest on unpaid interest. There’s more than a heartless banker narrative here. Anyone who collects reward points is implicated in this as well.

The wonderfulness of collecting credit card reward points has a cost that is in part paid by those carrying unpaid balances on their card and thus getting hammered by high interest rates. TD is charging as much as 20.99-per-cent interest on its credit cards while the Bank of Canada’s trendsetting overnight rate is 1.75 per cent.

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According to Bank of Canada data quoted by the Canadian Bankers Association, 70 per cent of Canadians pay their credit card balances in full each month and thus don’t pay interest. So TD is putting the squeeze on a small group of people who have fallen into maybe the biggest trap in personal finance – paying astronomically high rates of interest on unpaid credit card expenses.

But TD isn’t just transferring money from these unfortunate people to itself and, in turn, shareholders. Reward points are a big part of the cost of running a credit card business today, a load that is expected to rise this year because of increased competition between card issuers.

The source of that competition is the reboot of Air Canada’s Aeroplan loyalty program. TD is a lead Aeroplan partner and will want to make a big impression with the relaunch to both retain existing cardholders and lure new ones.

The card business is huge for all banks. Estimates by National Bank Financial Inc. analyst Gabriel Dechaine show credit card lending accounts for an average of about 2 per cent of total loans at Big Six banks, but nearly 10 per cent of profits.

There are a bunch of different ways banks make money from credit cards, including interest on unpaid balances, fees paid by merchants who offer credit cards as a payment option, annual cardholder fees and foreign exchange fees of 2.5 per cent in most cases when you buy something in a currency other than Canadian dollars.

Merchant fees aren’t easy to increase because retailers feel they’re already overburdened. The 2.5-per-cent foreign exchange fee is also tough to increase right now because more financial players are offering cards with a perk that eliminates this fee. Devaluing points is a standard strategy in the card business, but not something you want to do at a time when competition is increasing.

Banks could jack up card rates, but there’s a backlash risk. In this era of ultralow interest rates, credit cards stand out as a glaring exception. Moving to compound interest on credit cards is a more subtle way to get more money from people carrying a card balance.

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TD deserves to be criticized for targeting the financially vulnerable, but let’s not get too judgy. Not if we’re scooping up reward points financed in part by piling more interest on people who can’t pay their bills on time.

In a notice to customers, TD said unpaid interest will be added to a client’s balance at the end of each statement period, and will start appearing on April statements.

Royal Bank of Canada and Canadian Imperial Bank of Commerce told Global News their credit cards do not charge interest on interest, and Bank of Nova Scotia said it doesn’t on almost all of its cards.

With the outlook for banking looking restrained because of slow economic growth and low interest rates, expect other banks to follow TD’s lead in time. All avenues must be explored to keep profits and dividends to shareholders on the rise.

Stay informed about your money. We have a newsletter from personal finance columnist Rob Carrick. Sign up today.

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