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For the week of October 24, 2012



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Time for governments to step up and regulate credit card rates


August 1, 2012

There is no doubt where readers of Knowledge Bureau Report stand concerning July's poll question,  "Should governments have regulated exorbitant credit card rates instead of mortgage amortization periods?” Of the 72 readers who responded, 83% believe governments should regulate the interest rates charged by credit card companies.

In fact, regardless of how readers voted, they are in agreement on one thing: interest rates on credit cards — be it 20% for bank credit cards or 30% for department store credit cards — are way too high. And the economic reality is very few people can afford to pay their balances in full each month so the high-interest debt piles up. They are paying interest on interest.

Where readers differ is on the cure. The "No” vote thinks credit card debt is the individual's responsibility; if you don't have it, don't spend it. Consider Rosalind's comment: "Credit cards are intended to provide short-term credit. One should pay off credit cards every month, thus avoiding paying any interest charges at all. If you can't do that, don't make the purchase.”

Some members of the "Yes” contingent put forward another solution: they suggest credit card rates bear some relationship to prime. As one reader pointed out: "They bear no correlation to prevailing rates in the marketplace!”

As Ken White commented: "I know it's not that simple but I feel credit card rates should at least fluctuate with prime.

"I have always felt that by dropping credit card rates,” White adds, "you will put cash into consumer's hands and increase their net worth within 30 days of doing so.”

Other readers blame the easy availability of credit. Many Canadians have multiple cards and credit-card issuers are happy to raise the credit limits on those cards, taking the enthusiastic consumer further into debt. Then, in this environment of low-interest rates and high house prices, many consumers are consolidating their credit card debt in lower-cost lines of credit or mortgages.

"It is too easy to get large credit card limits,” wrote a reader, "and have several credit cards. With the interest rates so high a lot of people take their cards up to the limit and then find they will never pay them off without getting a loan, consolidating with their mortgage.”

Added Darren: "The problem goes far beyond mortgages and credit cards. It occurs when the individual rebuilds a debt load on top of existing 'consolidated' debt loads. What needs to be regulated is how the lenders of money can extend people too far. We consolidate, then keep the credit cards and line of credit 'just in case' and reconsolidate again. The serious issue will come when there is no more room for consolidation.”

One solution, suggested by yet another reader: set at a maximum credit card limit of 20% of the card holder's annual net income.

There were certainly a few readers who were vocal about the government shortening the amortization periods. Granted, over the term of the mortgage, the mortgagee pays less interest and saves more. But in the short term, mortgage payments are higher with mortgages with 25-year amortization periods than with 30-year periods.

"It is much more difficult to purchase a home without going into debt,” wrote Rosalind, "and with the cost of housing as high as it is, many families will find it harder than ever to afford the increased mortgage payment which results from the shortened amortization period.”

Added another reader: "Longer amortization periods can definitely work in favour of a mortgage holder if he or she knows how to take advantage of the ability to continue to make the payments they can afford, and by doing so, pay down principal much quicker.”


Knowledge Bureau Report would like to thank readers for responding to July's poll question and sharing their comments. August's poll asks: "Should Canadians’ retirement plans include leaving a legacy for their children?” We look forward to your comments.

Additional Educational Resource: Debt and Cash Flow Management