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What the proposed new credit card rules mean to you

Posted by admin on May 25, 2009 in Credit Score, Investment Information

Canada’s Department of Finance issued proposed new regulations on credit card rules which are aimed towards: (i) targeting certain abuses of the credit card industry; and (ii) providing better transparency for all credit card users. Since the regulations are subject to consultation, they are not final but here are a few proposed changes to be aware of:

1. There must be a 21 day grace period on new credit purchases. Currently, some credit card issuers accrue interest on new purchases if the customer has an outstanding balance carried forward in the previous statement. In other words, interest is charged on both the outstanding balance and the new purchase. The new regulations require credit card issuers not to charge interest for 21 days on the new purchase.
2. Allocation of payment will be beneficial to the customer. Some credit card charge different interest rates for purchases, balance transfer credit cards and cash advances with the credit card company being allowed to apply payments to the balance with the lowest interest rate. The new regulations would require credit card companies to allocate payment to the balance charging the highest interest rate or proportionally to different balances, with both methods resulting in lower interest being paid by the customer.
3. No credit limit increases without consent.
4. No penalties if credit limit is exceeded due to merchant holds. Some merchants place holds on credit cards until the transaction is completed (for example, if you book a hotel room, the hotel will hold place a hold on your credit card to ensure they are paid). If a customer’s credit limit is exceeded due solely to a merchant hold, the new regulations prohibit the credit card companies from penalizing the customer for exceeding its credit limit.

For most card card holders who do not use most of the credit provided or pay their balance in full every month, these proposed measures will have little to no impact on their everyday lives.

However, as part of a separate set of regulations, new disclosure rules are also coming into force:

1. Key information must now be in a summary box. The current regulations do not require interest rate information, grace period terms and other fees to be consolidated in one place. The proposed regulation requires all future credit card statements to consolidate the information in one summary box.
2. Disclosure as to consequences of only making minimum payment must now be provided.
3. Notice must now be provided in advance of interest rate increases.

While these are all positive moves, the cynic in me wonders about the law of unintended consequences. By requiring the credit card companies to add new layers of bureaucracy, its cost of business has just increased which means that one or all of the following may happen:

1. Increased annual fees;
2. Slashed credit card reward benefits (a move which is already occurring in reaction to the American version of new credit card regulations); and
3. Higher interest rates.

In other words, there may be an indirect tax to all customers which only further weakens those who cannot handle credit properly and punishes those who can.

Fundamentally, someone will always find a way to get around a law or regulation if they want to and no law is perfect. The larger question is what are governments doing to encourage education and awareness of personal financial responsibility on the consumer level? The relative silence on this matter is deafening.