Quebec has introduced new rules intended to make consumers to pay down their credit cards faster — and with less interest paid.
As of Thursday, banks must charge borrowers at least two per cent of their outstanding balance each month. The rate will increase incrementally, to 2.5 per cent next year and to five per cent by 2025.
For any new credit card agreements, the five per cent minimum payment already applies.
Scott Hannah, CEO of the non-profit Credit Counselling Society, said the policy is a “wake up call” for Quebec consumers.
“Quite frankly, there’s a need for the governments to do this,” he told Global News Radio’s Lynda Steele Show Thursday.
“All levels of government have been advising consumers, get your debt under control. Wean yourself off of using credit as a life line.”
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Lana Gilbertson, a licensed insolvency trustee and senior vice-president of MNP Ltd., said the change could see borrowers take meaningful action on tackling what they owe — not just the interest portion.
“One thing I can say from my professional practice is that many people struggle for years and years with credit card balances, never really getting anywhere in terms of making a dent in the principal,” she said.
Will the new rules make a difference?
Minimum payment rates are set as part of a credit card agreement. They vary by lender — some would already exceed Quebec’s new minimum — but generally, they make up a small fraction of what is owed.
While the difference between paying two per cent of a balance versus five per cent may seem insignificant, it could mean paying hundreds or thousands of dollars more over time.
According to an example shared by Quebec’s consumer protection office, a $1,000 purchase would take nearly 26 years to pay off and cost an extra $3,000 if the borrower only made a minimum monthly payment of two per cent, assuming a 19.9 per cent interest rate.
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Applying a three per cent payment to the purchase balance each month would cost you $980 in interest and take almost 11 years. At five per cent, it would take six years and $442.
Personal finance expert Rubina Ahmed-Haq called Quebec’s move a good step but said that even with mandatory higher payments, balances still take a long time to whittle away when you’re only contributing the minimum.
“Getting people to put more towards their most expensive debt is never a bad thing, but it doesn’t really address the problem,” she said.
While boosting minimum payments could help some consumers pay down their debts faster, Quebec’s policy might exacerbate the hardship for those just scraping by, Gilbertson pointed out.
“They may be forced to look at their legal options sooner than they might have otherwise done,” she said.
Insolvency and credit card debt in Canada
Canadians are increasingly reliant on credit cards and other forms of consumer debt.
Credit monitoring agency Equifax has pegged the average Canadian’s non-mortgage debt at just under $23,500, though that figure also includes other forms of debt such as lines of credit.
Though Canadians are racking up more debt, the number of those in serious financial trouble is relatively stable, at least by one measure.
Canada’s rate of insolvency — which includes bankruptcies and consumer proposals — is at 4.3 per 1,000 people as of last year. Within the last decade, the rate has remained roughly the same, with the exception of the recession in 2009 and 2010.
In Quebec, the insolvency rate is higher than the Canadian average, at 6.2 people per 1,000.
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“In most insolvency cases that I see, credit cards are a big culprit,” said Gilbertson, who practises in B.C.
Quebec’s minimum payment rule is unique in Canada, but it could inspire similar policy elsewhere amid concerns about skyrocketing levels of consumer debt.
Ahmed-Haq said that other provinces may adopt Quebec’s approach if it’s successful, but giving the example of the province’s unique subsidized daycare, she noted that other provinces don’t always follow Quebec’s policy lead.
Gilbertson said she’s interested to see if the move has the intended effect. But ultimately, she noted, personal financial decisions rest with consumers.
“I don’t think you can regulate good financial behaviour, or at least only in a very limited sense can you do that. But I do think that this may be a step in the right direction.”
On managing credit cards
Credit cards are “a tool, not a resource” for consumers, Ahmed-Haq said.
“It’s just a way of not having to carry cash around,” she explained. “And good personal finance advice is that if you buy something today for $300, you should have $300 in your account.”
She added that rewards-based cards, including ones linked to a particular store, can incentivize purchasing and lead to unnecessary spending.
Hannah told Global News Radio CKNW host Lynda Steele that balances on high-interest credit cards can be transferred to lower-interest debt, such as loans or lines of credit.
He also suggested taking credit cards out of your wallet and leaving them home if you don’t want to use them.
“It’s surprising, by getting rid of that temptation, what a difference it could make,” he said.
Asked what advice she’d give to a new credit card user, Gilbertson recommended paying the balance off in full each month.
She said it’s a good idea to have just one widely accepted credit card, with no supplemental users who can raise a balance the primary cardholder is ultimately responsible for.