Yesterday, Finance Minister Jim Flaherty introduced a number of new measures aimed at reigning in credit card practices. Here is a rough rule of thumb: If the credit card industry and the NDP are both unhappy, the regulations strike the perfect balance.
Yes, the credit card industry is complaining that their world will end, while Jack Layton claims the Finance Minister has capitulated to the bank. No, we will not need to have a wake for card issuers, they’ll continue do just fine. And a cap on interest rates won’t, shouldn’t, and can’t happen. Just like there won’t be caps on our incomes, that no car can sell for more than $20,000, or that retailers can only sell their products at a certain maximum markup.
What the Finance Departments’ regulations do address are four major areas which will benefit all card holders in measurable ways:
1) There will be a mandatory 21 day grace period of no interest on new charges. “Credit card inflation” has seen grace periods shrink from up to 26 days down to as low as 15 over the past few years. After all, the shorter the free ride, the more profitable each account becomes.
But the new regulation goes much further: Every card will now have this grace period, even if the account had a balance the previous month. What more than three-quarters of people don’t realize is that they never did have any grace period if they did not have a zero balance the previous month! Years ago, card issuers took that free ride away. It was “use it or lose it,” and even if the balance forward was one penny – all new charges were subject to interest immediately.
2) Credit card statements will now include a warning line that will show the length of time it will take to pay the balance in full, if making only minimum payments. And that will be a rude awakening for most people, and hopefully an incentive to step up their repayment plan.
3) Payments will now be allocated to balances in favour of card holders. Up until now, any payments were always applied to the lowest interest rate portion first. So, someone with part of a balance on a cool 1.9% rate, and a portion at 19.9%, could pay as much as possible, but not one dime would go towards the high rate portion of the balance. The new regulation now forces card issuers to apply any payments first to the higher rate balances.
4) You control your credit limit. The main goal of card issuers is to have us owing the largest amount of money and to pay the smallest payment possible. THAT is how they maximize their profit. To help their customers with this “going broke” project, limits keep increasing. After all, when the balance gets to be more than two or three months’ worth of income, there isn’t a chance someone can pay off the balance. Great for them – bad for the customer.
The new regulation requires card holders to explicitly consent to a limit increase. While a smaller limit does impact someone’s credit score, let’s be honest: If we claim we don’t let our credit card balances get beyond reasonable, why do we really need a limit of $10,000 or more?
In all these four areas, Finance Minister Flaherty found an appropriate balance of fairness to card issuers and us card holders. In fact, all four of the main regulations go beyond what the U.S. Government was recently able to pass in their “Credit Card Holder Bill of Rights.”
However, the most powerful impact Minister Flaherty can make is yet to come in the formation of the Finance Departments’ Financial Literacy Task Force, announced in the last budget. Why? Because I would bet that the vast majority of people reading the four changes will go: “I didn’t know that.” And THAT is precisely where the focus and efforts should be directed: towards financial literacy, starting in the school system where more than 85% of teenagers have never taken a course on finance or credit.