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High credit card rates a tax on those not smart with credit

00:00 EDT Thursday, October 18, 2001

Canada's big banks have been in vintage form this year in their handling of credit card interest rates.

While most borrowing charges have plunged this year, the cost of carrying a debt on a credit card hasn't budged. If you're a long-time card holder, you'll recognize this as situation normal.

Looking at The Globe and Mail's database, I found stories from 1995, 1996 and 1997 in which the banks were thrashed by federal politicians over high card interest rates.

It would be easy to dismiss the banks' lack of action on credit card rates this year as situation normal, except for one thing. In the United States, some card rates have declined noticeably in 2001.

Standard MasterCard and Visa card rates in this country have averaged something like 18.5 per cent in 2001, while the Bank of Canada's overnight rate has fallen to 3.5 per cent from 6.0 per cent at the beginning of the year. The overnight rate is expected to fall another half a percentage point on Oct. 23.

Think of the overnight rate as being like a weathervane signalling the overall trend for interest rates. Except Canadian credit card rates, apparently.

The situation in the United States is quite different. Rates on a wide range of U.S. standard cards and platinum cards began a decline in the spring, when the U.S. Federal Reserve Board began an aggressive campaign to revive the economy by pushing interest rates lower.

In January, a standard fixed-rate card in the United States had an average interest rate in the range of 16 per cent. Now, the rate is more like 14 per cent.

This isn't a huge move, but it does have some symbolic value. The economy's in the dumper, rates are plunging and U.S. banks are acknowledging this with lower card rates.

In Canada, nothing. Again, there's nothing new in this.

"When interest rates change at the central bank, the research really shows a difference between the American and Canadian situation with respect to credit cards," says Robert Kerton, an economics professor at the University of Waterloo and a specialist in financial consumer issues. "American banks adjust more quickly to rate changes."

The Canadian Bankers Association uses the old economy-of-scale argument to explain the difference between the card environment in this country and in the United States.

"Our customer base in Canada for credit cards is considerably smaller than in the United States, but we have a lot of the same infrastructure costs," said Denise Harrington, the association's vice-president of public affairs.

Ms. Harrington also said cards offered in Canada tend to offer a wider variety of features than U.S. cards.

Anecdotally, I'd have to go along with this. I've looked at those junk mail pitches from U.S. credit card banks such as MBNA and Capital One, and the cards just don't match up to the deals offered by some of our domestic banks.

Unfortunately, more card frills seems to equal less competitive card rates in the Canadian market.

In its latest credit card cost bulletin, Industry Canada notes that card rates usually lag changes in the overnight rate by three to six months.

The lack of action by the banks this year is reflected in the growing spread, or differential, between the Bank of Canada's benchmark rate and average card rates.

The spread has averaged 13.6 per cent over the past four years and roughly 10.5 per cent since January, 1978, Industry Canada says. Now, the comparable number is about 15 per cent.

It's also worth noting that the rate on the average standard U.S. card is about 12 percentage points higher than the Fed's discount rate, a benchmark lending rate.

Canadian banks aren't crazy about people using the bank rate as a reference for credit card rates. They argue, with justification, that a lot more goes into the calculation of card rates than simply the cost of borrowing.

For one thing, there's the cost of losses on unpaid card debts and fraud. Industry Canada says that for the 12 months to June, 2000, card fraud losses totalled $203-million.

Then there's also the cost of loyalty programs such as Air Miles, and of card features such as car insurance and purchase protection, where a product bought using a credit card is replaced if you break it.

If you're one of the 50 per cent of card holders who pay their balances off in full at the end of each month, the tradeoff of more frills for higher rates will work just fine.

If not, stop accepting those loyalty card bribes and switch to a low-rate card. Or, borrow from your line of credit to pay your card bill. If you're snowed under by card debt, cut up the card and get a consumer loan to pay off the balance.

High card rates are a tax on those who aren't smart with credit. Get smart and you'll never worry about credit card interest rates again.

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