Don’t get me wrong, given the amount of complaining from the banking industry, Jim Flaherty’s new credit card rules seem to be a very good start, but I would dearly love to see them go a little farther. Â My concern is the major problem is still not being addressed, which is the exorbitant interest rates allowed.
Loan Sharks Blush
The rates that Credit Cards charge as regular business while cheaper than seen from the Pay Day Loan world are still completely out of sync with bank rates. They are allowed to inflict this kind of usury on consumers. There are no rules capping the rates that can be charged. I think that is what is missing from this legislation. Allowing unfettered rate increases is asking for trouble.
Better rules for credit limits would be good as well, stopping folks from being able to bump up their limit via a simple phone call seems a dangerous practice as well. If you want to lower your credit limit you have to send in a signed document and such, but to increase your rate is a simple phone call, wonder why that is?
While I know the other issue with credit card debt is that people are using Credit Cards as short-term credit mechanisms (and then turning them into long-term credit vehicles, since they can’t extricate themselves from the debt), and that a lot of the financial pits dug by consumers are self-inflicted, I think the Credit Card companies make this trap a little too easy to fall into.
There was one credit card lobbyist complaining about how teenagers and young folks won’t be able to get credit cards if new rules are put in place. I believe I shouted at the TV, “… and that is a BAD thing?”, so my view is less credit cards to less folks might just be a good thing.
Nobody needs as many credit cards, as we all have!
Other Useful Documents
A useful link for those who are learning about Credit Cards is a document posted by the FCAC called Getting The Most From Your Credit Card. They also have a very good beginners document called Your Rights and Responsibilities , well worth a read as well.
I quite agree to credit card companies are way out of hand for the amount of money that you are and what they charge. How can national interest rates be so low and they raise the charges on credit cards for good customers and really squeeze the overdraft rates. Don’t they know that this will alienate their customers, they must really think that we are stupid, how many times have you recommended a credit card to a friend? I bet that nobody does that anymore!
I disagree entirely with your hatred of high interest rates. Look, there’s a reason why credit cards have such high rates. It’s unsecured debt. You should pay more if you finance beer and smokes than if you finance a house.
Pay Day Loan companies don’t just exist to screw people. They exist because there’s a market. I guarantee you that 90% of people who get these loans have no other financing choice. They’ve maxed out their credit cards and none of their friends or family have any money because, chances are, they’re dirtbags. We can debate the reasons for the borrower getting these loans all day long, but the fact remains that they exist because people want them. What happens to that market when you take away their only financing option? Remember, they’re getting the payday loan because they’re DIRTBAGS.
Beer is a fluid that, when overconsumed, can lead to everything from acting like a dumbass to drunkenly crashing your car into another. Maybe we should ban it too. Ditto with smokes, cheeseburgers, sugar and internet porn. Where’s the line?
I know you’re trying to protect the little guy. The little guy knows what he’s getting into. He just doesn’t care.
A might cynical there, I think people make choices, sometimes bad ones, but allowing companies to prey on these bad choices is not the way to go.
I cannot for the life of me see any reason to cap interest rates. What’s next? Price controls on the price of cars, food, electronics, flat panel tvs, haircuts, slurpees, chocolate bars, books, garden tools……..
If people don’t like the interest rate on their card they have options. Switch to a lower rate card or pay your freaking bill in full every month and then you don’t have to pay any interest. Stop spending money you don’t have and you won’t have a problem.
In that case why not start campaigning for minimum credit score legislation instead of the campaign for lower interest rates for unsecured borrowers?
I would think that pay day loans, rent to own, buy now pay later, and all the other schemes companies come up with to extract money from people who don’t really care all that much to read what they sign would be a much better target than credit cards.
Agreed, but I think BOTH need to be in any legislation.
A vast majority of people who use credit cards pay them off every month. The rules are made to help the most people.
Exactly how much interest should be charged? Lets say you want to make a 10% return on your funds and you lend 100 people $1000. At the end of the year you want to have 110000. You know that 3-5% of people will not pay back the money they owe. So lets say in month 3, 6, and 9 one person defaults and you won’t receive the remaining funds.
This means that 1 loan you one receive 3 payments making about 275 bucks, then next only about $550, and finally one you get about $826. After that all the rest of the people pay back their 1100 bucks. So charging people 10% with a 3% default rate for the year will yield somewhere near 8.3%.
Of course, then there are transaction fees and things like that, but then again, in this example 70% of people didn’t use your money and not pay interest on it either.
According to this article: http://money.aol.ca/article/us-credit-card-defaults-rise-to-new-highs/625267/
“American Express default rates jumps to 10.10 percent
Bank of America charge-off rate soars to 10.47 percent
Citi credit card default rate rises to 10.21 percent”
Blame people who borrow money they can’t pay back for high interest, not the company offering the loan.
I do blame them somewhat, however, I do not believe the Banks are any less at fault for gouging either. Simply saying, “We charge this rate, because we can…”, is not the way to do business, simply don’t give High Risk folks access to the money in the first place.