Bitter medicine, good for you

Bitter medicine, good for you
Dian Cohen (Photo : Courtesy)

If you have an outstanding balance on your credit card, get ready for a big surprise. Starting next week, Aug. 1, 2021, the minimum is going up.
The Quebec government has just amended legislation that went into effect two years ago. Right now, Quebec residents pay a minimum of 2.5 per cent of the amount they owe. Starting next week for Quebecers, that minimum will increase to 3 per cent, then will continue to increase 0.5 per cent every year until it reaches 5 per cent in 2025. This gradual increase applies only to accounts that are already open. Any new credit card account that’s opened after Aug. 1 will carry a minimum payment of 5 per cent. That was also the case when the original Bill 134 came into effect.
The timing of this amendment is interesting, considering the fact that consumer credit card debt outstanding is at a six-year low, as the pandemic induced lower spending through all of 2020. “Across the board in all age groups, we’re starting to see people pay more than they actually spend on a credit card, which is a real positive behaviour change in terms of consumers,” said Rebecca Oakes, assistant vice-president at Equifax, who said consumers paid $11 for every $10 they spent in January 2021.
Credit cards have always been a blessing and a curse – a blessing if used sparingly to purchase bargains and get paid off within the month; a curse because it’s so easy to hand over a credit card without thinking of the 18, 21 or 28 per cent interest rate it carries if you don’t pay off the balance in full.
A couple of questions come to mind: Why focus on minimum payments? Why not ensure that interest rates are not as high as 18 or 28 per cent? Why not ensure that people who are approved for credit cards are able to pay the balance off? The answers are complicated.
In Canada, regulation of a lot of things is split between the federal and provincial governments – credit cards among them. Regulation of interest rates is in the hands of the feds – namely the Financial Consumer Agency of Canada. Protecting the consumer belongs at both levels, but the province prevails.
Spokesman Charles Tanguay of the Quebec Consumer Protection Office says the Quebec government is acting now because it is concerned that federal and provincial government emergency financial payments as well as credit payment deferrals will disappear soon and people need to rely only on the money they earn.
The Interest Act of Canada is silent on the level of interest rates – it basically says whatever rate the borrower and lender agree on is okay. The Criminal Code of Canada sets the maximum allowable annual interest at 60 per cent – interest above that level is usury and a criminal offence. (By this standard, credit card companies are shining examples of restraint.) However payday loans are exempt from Canada’s usury laws.
The Canadian Bankers Association provides some rationale for the 20+ per cent rates: you get an interest-free period from purchase to payment – the card issuer pays the costs. And you get access to unsecured credit where no collateral is needed – the issuer assumes the risk of your defaulting on the loan. Finally, the card issuer pays the cost of processing millions of transactions, upgrading security and other technology, mailing statements, collecting payments and providing value-added rewards.
The Financial Consumer Agency of Canada (FCAC) monitors and supervises all federally regulated financial institutions. Michael Toope, spokesperson for FCAC says his agency makes sure that these financial institutions comply with all the regulations that are in place to protect consumers, but that “the financial institutions that issue credit cards make their own determinations about whether to issue credit cards to consumers who apply for them…. (our job) is to protect financial consumers by strengthening financial literacy, helping consumers understand how credit cards work. “
The Quebec Consumer Protection Office (https://www.opc.gouv.qc.ca/en/credit-cards-minimum-payment-maximum-interest/) has an excellent website that’s well worth a look. Here’s an example of how much interest you pay if you don’t pay off your balance in full each month. Say you found a great electric bike for which you paid $1,000 using a credit card with a 19.9 per cent interest rate. Pay off 100 per cent of the balance – no interest charges. But pay only 5 per cent of the balance, you’ll be charged $414 in credit charges and it will take you almost five years to pay off the bike. And if you just pay the new minimum of 3 per cent, it will take you eight years and an additional $852 in credit charges to pay off your debt. So that great bike at $1,000 has now cost you $1,852. Not such a bargain after all. Of course, this minimum payment will keep your credit rating okay, but you’re paying a stiff price.
M. Tanguay says his Office is always concerned about the overuse and abuse of credit cards: “These cards are supposed to be convenient when you don’t have cash on you, but they can get you into a lot of financial trouble of you’re not careful. If you miss a payment or you spend more than you can afford, additional credit charges add up quickly and make your total debt much higher than it was.”
If you find yourself in one of these situations, especially after Aug. 1 when your next bill may be a shocker, there are counselling agencies to help: People’s Budget Service of Sources www.sbpdessources.com T: 819 879-4173 or ACEF de l’Estrie www.acefestrie.ca T: 819 563-8144.
Most Quebecers are pretty good with money. According to Equifax, more than three million Canadians took advantage of credit payment deferrals since the start of the pandemic and four out of five of these have now completely exited the use of deferral programs. “Payment deferrals have been instrumental in preventing consumers impacted by the pandemic from becoming delinquent on their debt obligations. Even as consumers come out of deferral programs, the 90+ day delinquency rate for non-mortgage products stayed level in Q4 at 0.98 per cent. However, early-stage delinquency (where an individual has missed one or two months of payments) continued to rise during Q4.”
“The numbers suggest recovery will remain very uneven,” adds Rebecca Oakes. “Quebec, for example, has shown early non-mortgage delinquency continue to fall despite consumers leaving deferral programs… The support mechanisms across Canada remain pivotal in the prevention of further increased delinquency levels.”
The best support I can think of is: don’t use a credit card at all, but if you do, pay off the balance promptly each month. If you’re going to rethink the card you have, or are just about to apply for a new card, you may want to check out https://itools-ioutils.fcac-acfc.gc.ca/CCCT-OCCC/SearchFilter-eng.aspx — this is FCAC’s credit card comparison tool and it has dozens of options for cards with lower interest rates.
Dian Cohen is an economist and a founding organizer of the Massawippi Valley Foundation.
Cohendian560@gmail.com.

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