This text is taken from the Courrier de l’économie. To subscribe, click here.
Why aren’t credit card interest rates going down with the recent cut in the prime rate?
Canadian banks closely monitor the Bank of Canada’s policy rate for many of their financial products. Credit cards, however, are either barely affected by rate changes or much more slowly than other forms of lending.
The reason, in one sentence: they are not subject to the monetary policy of the Bank of Canada. They respond to the forces of the Canadian banking market, where, as in many economic sectors in the country, competition is weak, as well as to the demands of the credit companies that issue these cards, led by Mastercard and Visa.
This is why the interest rate on credit cards is high and changes little. In 1978, it was about 19%. In 1991, it was 20%. According to Option consommateurs, it fluctuates these days between 11% and 29%. The current rate is between 19% and 21%.
Following the sustained increase in the Bank of Canada’s key rate in 2021 and 2022, some banks have increased the interest rate on some credit cards by one percentage point, for example from 20.99% to 21.99%. If we rely on the trend that has prevailed since 1978, the Bank of Canada will have to return to a much lower key rate and in a relatively sustainable manner for this rate to decrease in turn.
Fixed rate, variable effect
The interest rate on credit cards is not usurious (it would have to be higher than 35%…), but it remains high, there is no doubt about it. And it mainly concerns people with a tight budget, who have to buy essential goods on credit and then struggle to pay off their monthly balance.
It must be said that the credit card is a form of unsecured loan, considered higher risk by banking institutions. If you cannot repay a car loan, the lender can always repossess your vehicle to compensate itself. It can hardly demand that you return your restaurant meal or your trip to Europe if you are then unable to repay the balance of your credit card…
Credit card interest rates vary little, but they’re not strictly fixed. They fluctuate based on the type of card or transaction: a cash advance will have a higher interest rate than the rate charged on an outstanding balance. And if you’re late in paying off that balance, the rate charged could also go up by as much as five points. Your credit history will also affect the interest rate on your credit card, since banks tend to be more lenient with customers who have a better repayment history.
Banks also sometimes offer “low-interest rate” cards, where the rate is temporarily reduced (for example, to 0.99% for the first 9 to 12 months, or 13.99% for two years, and so on). These lower-rate cards often come with an annual fee of a few dozen dollars.
This rate is then applied daily (you must then divide it by 365 to know the exact value), and it applies if you do not pay the monthly balance of your card on time. It is calculated from the day of purchase, for each purchase that is not paid.
Federally chartered banks must notify you in advance of any interest rate increases on credit cards they issue, but they can raise them at any time, for no particular reason. So it’s important to read the terms and conditions in the very small print on the document that came with your card when it was sent to you. This document contains all the details about the interest rate and the conditions under which it could change.
Option consommateurs reminds us that: 1) you can compare and shop around for credit cards to get the best rate; and 2) when you pay your balance on time, interest is not charged.
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