Every Saturday, one of our journalists, accompanied by experts, answers one of your questions on the economy, finances, markets, etc.
Posted at 1:25 a.m.
Updated at 9:00 a.m.
Hello, I would like to know how we arrived at interest rates of 19% to 29% on certain credit cards. Why do these rates continue to increase even if the Bank of Canada lowers its key rate? THANK YOU.
Jean Mousseau
The reduction in the prime rate certainly brings relief to people who have taken out an adjustable rate mortgage loan, as well as to those who are preparing to borrow. Why aren’t credit card holders entitled to the same pleasure?
It’s true that over the last five years, we have experienced a pandemic, an increase in interest rates, a plateau, then, since last June, a decline. Meanwhile, credit card interest rates have remained relatively stable. There is reason to ask questions.
First, credit cards generally have a fixed interest rate, points out Carlos Castiblanco, economist and analyst at Option consommateurs. “This is already established in the conditions of the agreement, so it is not influenced by variations in the Bank of Canada reference rate,” he explains.
There are still a few exceptions. For example, a few years ago, TD Bank offered a credit card with a variable interest rate based on its prime rate (which is 5.95% at the time of writing), plus an additional percentage. according to the evaluation of his credit file (5.5% in the best case, 13.75% in the worst case). It is no longer offered to new customers, but those who had subscribed to it and who still use it actually see their interest rate drop when the key rate falls.
Even with one of these rare variable rate products, you end up with an interest rate that is generally higher than other types of loans. As of August 2024, the average interest rate on issued and existing credit card loans was 20.55%, according to Bank of Canada data. This is far from the average interest rate for a mortgage loan, which varies between 3.08% and 8.85% depending on the scenario.
In fact, credit cards represent an unsecured loan. The bank has no assets to seize in the event of default.
Carlos Castiblanco, economist and analyst at Option consommateurs
With a real estate or car loan, it’s quite the opposite: the bank can seize the house or car in the event of payment default.
“To compensate for the higher risk, interest also tends to be higher,” summarizes the economist.
Regulations
Personal lines of credit, another type of unsecured borrowing, generally have lower interest rates than credit cards. As of August 2024, the average interest rate on unsecured personal lines of credit was 10.45%. For what ?
” Normally [l’attribution de cette marge] has more to do with the relationship that the client maintains with the financial institution,” underlines Mr. Castiblanco.
Getting a line of credit is more complicated than getting a card, which can often be done simply by filling out a form. The financial institution is therefore better able to assess the degree of risk it takes in granting this loan. “With a credit card, it’s very easy for the bank to think it’s going to be a loss,” he says.
Over the years, the rate granted to credit card holders does not vary much. It’s difficult for issuers to raise rates because they are much higher than other credit options. And it is also difficult for them to decide to lower them, because of the risk involved, explains Carlos Castiblanco.
The Option consommateurs organization is also calling for more regulation to govern the interest rate on credit cards.
“The prices can be very, very high. At 20% on purchases and sometimes 23% on cash advances, it can be a good tool for building credit, but it also leads to debt, and many are not aware of this. implications behind a credit card,” he raises.
Reminder: after a grace period of 21 days following the issue of the bank card statement, interest begins to accrue. In the case of a cash advance, there is no grace period.
The minimum monthly payment is 5% of the balance. If not made, the interest rate may increase, depending on the terms of the credit card.
