Wednesday, January 28, 2009

Federal Budget Promises New Credit Card Regulations

Along with income tax breaks and massive government spending, yesterday’s federal budget promises to “enhance consumer protection by limiting [credit card] business practices that are not beneficial to consumers.” Unfortunately, the budget is vague on what changes will be made.

Here are some of the promises:

1. clear summary information on application forms and contracts
2. clear and timely advance notice of changes in rates and fees
3. minimum grace period on new purchases made with a credit card
4. improved debt collection practices

The budget doesn’t contain much more detail than this. The third point about requiring a minimum grace period on new purchases could be interesting depending on what it means. The “grace period” is the time when no interest is charged on new purchases.

My credit card agreement tells me that I get a grace period only if I paid my bill in full last month and pay it in full this month. The grace period extends from an item’s date of purchase until the payment due date on my credit card bill. I guess not all credit card agreements are as reasonable as mine and the government feels the need to guarantee some minimum grace period.

Another interpretation of this minimum grace period promise is that it will apply to all purchases regardless of whether you pay your bill in full or not. If this is right, then even if you carry a balance, your purchases wouldn’t accrue interest for some minimum number of days. Don’t get too excited, though. In a quick poll of some friends, nobody thought that this was likely the right interpretation of the budget language.

So, we’re left with the vague feeling that something will be done to make credit cards better for consumers. I hope this is true. But, don’t look for big reductions in interest payments. If government rules were to cut too deeply into credit card profits, banks would cancel many people’s cards because the risk of default would be too great for the reduced reward.


  1. I hope that is the right interpretation, and I don't see why that would be unreasonable. Sure, we'll hear lots of bleating from the credit card companies, but are those rules really unfair? I don't think so.

  2. Patrick: I would like to see all credit card holders get a guaranteed period of no interest on new purchases regardless of whether they carry a balance or not as well. But, in trying to separate what I hope is true from what I think is actually true, I'm guessing that this interpretation isn't the right one.

  3. I think the important thing is to make sure disclosure is excellent. Make sure everyone knows that if you carry a balance, you will have to pay interest from the day of purchase.

    I don't think disclosure is very good, because every once in awhile I hear a new (to me) fact about credit cards. For example, if you pay one cent less than your balance due, you will incur interest on all your purchases from the date they were made. It's almost like they are charging interest retroactively.

    I occasionally have a Mr. Magoo moment and forget to pay my balance. I then make sure to fund the card with enough cash such that my balance is above zero until I can get back in good graces. I then write an apologetic fax asking that my interest charges be reversed, even though it was my fault. It usually works, since I virtually always pay my balance.

    As someone who carries no balance, I find credit cards to be a great convenience, and my bias is to allow credit card companies a lot of leeway in how they conduct business. I just don't want to have the benefits of my credit card diminished due to government regulation. Selfish, eh?

  4. I would love to see the opportunity for card holders to select a lower interest rate with the same minimum payments in effect and the spending limit being constantly decreased by the repaid amount.

    Caping credit card interest to 15% would not be a bad idea 20-25-30% is not an ethical interest rate given todays prime!

  5. Gene: I understand what you mean about the selfish side of credit cards. I don't carry a balance either. But, I see enough people close to me who are harmed by credit card interest that I would prefer to see them protected more. Hopefully, improved disclosure will help.

    Anonymous: It sounds like you're asking for a credit card feature where a consumer can ask that his card not be allowed to be used for new purchases. I suppose you could do this on your own by freezing it in an ice cube in your freezer. A side effect of limiting credit card interest rates would be that many more people wouldn't qualify for credit cards. This might not be a bad thing, though.

  6. Maybe more disclosure wouldn't help. The disclosure is there if we want to read it, but I ignore it until something has gone wrong, or I encounter a strange new situation.

    Reminds me of those licence agreements I confirm when installing new software. I never read the things, and for all I know I've sold my soul or given up my power of attorney.

  7. Hi Michael

    Thanks for picking up on my comment.
    It is actually interesting on how un-ethical we are. We consider the Moneymart around the corner an almost shady business and interest rates above 30% are definitely considered unethical. At the same time holding Citi bank shares which doesn't object to interest rates of 29.99% doesn't seem to bother anyone. Excessive interest rates are a crime.

  8. Hey Gene;

    Some of the software EULAs are actually in dicey ground. Right now the typical one promises that it may deliver the functionality as "written on the box" and probably won't hose your computer.

    Reading them is actually kind of pointless, b/c they're all non-negotiable. And if you bough software from a store, then read the EULA and didn't like it, you wouldn't be allowed to return it.

    All in all, it's all really "shady". But none of it is being legislated b/c no one in legislature is really even qualified to start trying.

    Of course, people have run the "disclosure tests". Investigative journalists have even proposed more clear disclosure of terms and tested it on real-life people, but it turns out that apathy is a really hard habit to kick.

    No one is going to change cards b/c the terms on their new card are "clearer" than their old card. No one turns down a credit card b/c they don't understand the terms. No one takes 10 cardholder agreements, compares them and then picks the best ones.

    People simply don't care enough. So even though we do have legislators who could legislate credit card terms (unlike the EULAs above), it won't really matter what they do. Most people simply don't care enough.

  9. I've worked for credit card companies. I rarely agree with their practices and loath the Citi-Bank type obsession with high risk customers. However, I do think that we tend to focus more on how hard done we are as consumers and less on the realities of running a business.

    1 - More disclosure will only work if people actually read it and understand it. We can't regulate the public into taking the time to take accountability for their finances. I believe that right now a company has to provide notice of changes to rates, agreements, etc. two months in advance. If we increase this, would we not be stifling their ability to react to the market or be innovative? When we used to make changes, we would need to begin planning them six
    + months in advance so that they could go through the lawyers and various departments. It never, ever happened overnight!

    2 - I'm not sure why people would be entitled to a minimum (note, I'm assuming that they mean "length") interest free grace period on a credit card and why the government feels the need to regulate this. I am also okay with the concept that this is a perk that you only get if you pay off your balance in full on time. Otherwise, you're giving people who can't control their spending an incentive to spend more.

    3 - Interest rates on credit cards is not just a fact of what the current prime rate is. Its composed of a few important things. The cost of capital - so what the credit card company has to pay for all the purchases we make, and this becomes more expensive when people don't pay their balances. The cost of bad debts - so the company has to absorb the cost of the purchases that people who go into collections/bankruptcies in addition to the cost of servicing those accounts. The cost of loyalty programs! Canada is the number one consumer of loyalty programs in the world, and these are not free people. We pay for it through things like increased APRs on credit cards. Lastly, things like general operating expenses and salaries. Every single transaction carries a cost. Printing and mailing statements carries a cost.