Senator Pierrette Ringuette

Fight to cap credit card interest rates, fees heats up; Feds accused of ignoring 'boiling mad' consumers as debt sparks flashpoint

The federal government should take immediate action to control interest rates and fees on credit cards because those climbing costs are choking consumers and businesses amid the deepening recession, says Senator Pierrette Ringuette.

Ringuette, a Liberal from New Brunswick, argues the upcoming federal budget is a golden opportunity for Conservative Finance Minister Jim Flaherty to tackle the controversial issue of regulation.

Caps on interest and other fees are firmly on the political agenda in other countries. But with no clear sign that such measures are in the works here, Ringuette is urging members of the upper chamber to champion the cause.

As Flaherty unveils his budget in the lower house on Tuesday, Ringuette will lay the groundwork to revive a motion for the Standing Senate Committee on Banking, Trade and Commerce to probe Canada's credit card and debit card systems. In addition to scrutinizing consumer rates, she wants to examine other behind-the-scenes charges including interchange and merchant discount rates.

"Canadians must be boiling mad right now because nobody is paying attention to the consumer," Ringuette said. She questions how the economy can rebound if consumers and businesses must absorb higher costs on credit cards at a time when many are struggling to stay afloat.

There were 68.2 million Visa and MasterCard cards in circulation in Canada last year, up from 64.1 million in 2007. But banks have also tightened lending terms, including stiffer interest charges for clients who pay bills late. In some cases, rates can climb to 24.75 per cent.

"There is no indication that interest rates will be coming down," Ringuette said. "...government must intervene to help consumers out of this and help the small- and medium-sized businesses through this."

Ringuette originally introduced her motion in December but Parliament was later prorogued. She believes the economy is giving the issue new urgency, adding it is "pretty scary" that Flaherty has failed to signal concrete plans to address it in the budget.

Alberta Premier Ed Stelmach has asked Prime Minister Stephen Harper to consider "limiting credit and debit card processing fees" as a budget initiative. A spokesperson said Flaherty is considering all suggestions from pre-budget consultations but won't reveal final details until Tuesday.

For her part, Ringuette will address the Senate later in the week. As Canadians wait for those developments to unfold, there are already signs that credit card lending is poised to be a flashpoint in 2009.

Banks are predicting more defaults, particularly if the job market tanks. In 2008, delinquencies 90 days and over edged up slightly to 1 per cent for Visa and MasterCard, according to the Canadian Bankers Association (CBA).

Consumers also appear to be getting mixed messages on responsible card use. In a recent press release, MasterCard states: "a credit card is a great way to track all your smaller expenses to the penny." It also suggests that tracking monthly bills "can be simplified" through preauthorized card payments.

At the same time, MasterCard warns consumers against using credit as "an extension" of their income. Kevin Stanton, president of MasterCard Canada, disagrees the advice is contradictory. He points to statistics that show 73 per cent of Canadians pay off their balance in full every month.

Said Stanton: "If you understand how credit cards work, they are the best way to manage your finances, track your expenses... If you delude yourself into believing it is free money, you are headed for trouble."

The CBA stresses there are plenty of choices. "With over 23 companies issuing credit cards in Canada there is lots of competition on interest rates and over 68 low-rate cards in the market," it said in an email.

"...For those who do carry a balance, there are other low-cost options available like lines of credit. It's important to remember that credit cards provide valuable access to unsecured credit with no collateral requirements."

When it comes to Ringuette's motion, the CBA says "public debate is always healthy." If it passes, there will be plenty of facts to chew on.

New data from the Bank of Canada shows credit card balances shot up by more than five per cent during December to $53.4 billion, up 10 per cent from a year earlier. Even before that figure was released, some bankers said higher balances were inevitable.

"There is likely to be an uptick in card balances, I think, over the course of the next year or so just given what's gone on in the market," said Chris Hodgson, head of domestic banking at the Bank of Nova Scotia, at a recent conference. "I think it would be naive to think that isn't going to happen."

Meanwhile, research firm Technology Strategies International predicts credit card payments will account for 38 per cent of consumer expenditures by 2013.

Critics say phenomenal growth, coupled with rising interest rates, only strengthens the argument for regulation. During the last election, NDP Leader Jack Layton argued for a cap on credit card interest rates set at 5 per cent above the banks' prime rate.

Other countries, meanwhile, have bolstered regulations. In December, American regulators announced sweeping changes, including a new rule to protect consumers from interest-rate increases on existing account balances.

Taking effect in 2010, that change means credit card companies can only raise interest rates on new cards, future purchases and advances.

"While the new rules are designed to increase protections for consumers, the Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history," states the American Bankers Association.

In Britain, the Federation of Small Businesses is lobbying the government to cap credit card interest rates to help small businesses. Card companies had already vowed to stop quickly raising interest rates when customers are late on payments - instead giving customers the option of transferring to a different credit card deal or freezing the account and allowing debt to be paid off at the existing interest rate.