Credit Cards: Why The New Rules May Not Be Good News For You
September 6th, 2010 by A Licensed Insolvency Trustee
On September 1, 2010 new credit card regulations took effect in Canada. What are the new rules, and what will they mean to you? Here are the three new regulations:
The New Credit Card Regulations in Canada
First, credit card issuers must offer a minimum 21 day grace period, during which they can’t charge you interest on new credit card purchases, provided you pay off your balance in full by the due dated. Under the old regulations grace periods varied, and the card issuer could charge interest on purchases from the date of the purchase if you had not paid last month’s bill in full.
Second, when you make a payment on your credit card above the minimum amount, that payment must be applied to the balance with the highest interest rate first, or proportionally to all transactions. Under the previous regulations credit card issuers could apply payments however they wanted, such as applying payments to the lower interest balances, resulting in higher interest payments.
Third, your monthly credit card statement will be easier to understand, and must include disclosure of how long it will take you to pay off a balance if you only make the minimum payment. They must also give you advance notice if they are increasing your interest rate.
What The New Credit Card Rules Mean for You
On the surface, these new regulations appear to be good news for consumers. You are now guaranteed a 21 day grace period when you make a purchase on a credit card, so if you pay your balance in full at the end of the month, you now have a 21 day interest free loan. Your payments will be applied to your highest interest rate balances, which may reduce the interest you pay, and you will be notified of interest rate changes in advance.
But a closer review of the new rules reveals that this may not be a good news story for you.
First, as reported in the Globe and Mail, when similar regulations were introduced in the United States, card issuers responded by raising the interest rates they charge. Whether or not that will occur in Canada remains to be seen, but it’s easy to see why it happened: if the credit card issuer is making less money due to a longer interest free grace period, they can recover that lost income by raising the interest rates they charge. So, in the end, consumers may not benefit from the new rules.
But there is an even greater reason why these new rules are not good news for you:
You should not be paying interest on credit cards!
Credit cards are a very expensive way to borrow. A “low interest” credit card may have an interest rate of 12%; a standard card has an interest rate of 19%, and a department store or gas company card may have interest rates of 25% or higher. Contrast that with mortgage rates in Canada of around 5%, and you can see that credit card interest rates are very high. And yes, I realize that a mortgage is a loan secured by real estate, and therefore will carry a lower interest rate than an unsecured credit card balance, but even a comparison to loan rates charged by banks for unsecured lines of credit will show that credit cards have very high interest rates.
As consumers, we pay for convenience. A credit card is very convenient. Swipe it, and you’re done. But you are paying a huge price for that convenience.
So here is my new credit card rule, that you can implement for yourself, immediately, today:
Do not carry a balance on your credit cards.
That’s it. It’s a simple rule, and it means you will never pay another cent in high credit card interest.
If you must borrow, borrow at lower rates by getting a home equity debt consolidation loan (if you own a house), or a debt consolidation loan at a lower interest rate, and save money.
What do you do if you can’t qualify for a debt consolidation loan? What can you do if you owe so much on your credit cards that the bank won’t lend you money to pay off your credit cards? You have a few choices:
- Pay off your debts on your own. Make a budget, cut your expenses, and pay off your debts yourself. This works well if you owe a manageable amount.
- If you can afford to pay off your debts in full, but just need a break on the interest, credit counselling is an option.
- If you can’t afford to pay off your debts in full, but you can afford to pay back something, a consumer proposal is a logical option. Most credit card companies will accept a reasonable consumer proposal.
- If you can’t afford a proposal, personal bankruptcy in Canada may be your final option.
Use our free debt options calculator to review your options.
Don’t be fooled into believing that the new credit card regulations will help you. The best credit card debt is no credit card debt, so make a plan today to eliminate your credit card debt, because with no debt you don’t need to worry about grace periods or interest rates. Be debt free.