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How are credit card interest rates decided?

Jan. 6, 2023
5 mins
A person taps their credit card on a point of sale terminal

The holiday season is hard on your credit card bill. A recent Equifax report reveals that 41% of Canadians were already in so much debt by the time the holidays rolled around that they limited their spending for the season.

However, Ontarians may be an exception to that statistic. According to a recent RATESDOTCA survey, 47% of Ontario residents said they planned to spend more on the 2022 holiday season than the year before. With 15% of respondents saying they used a credit card for holiday spending, lots of people are going to see some big numbers on their credit card bills in January.

If you’re one of those people who have a high credit card bill, you may be making only the minimum payments. That’s not a big deal, right?

The problem is the interest applied to your credit card bill any time you don’t pay your full monthly balance. As different credit cards have different interest rates, how do you know what rate you’ll be charged? And how does credit card interest even get decided?

Each bank sets its own interest rates for credit cards

Léonie Laflamme-Savoie, a spokesperson for the Financial Consumer Agency of Canada (FCAC), notes via email that every financial institution sets its own credit card interest rates. That’s why each credit card — even those from the same bank — may have different interest rates.

However, there are some government-enforced interest ceilings. The Criminal Code of Canada considers it an “offense” for institutions to charge more than a 60% annual rate of interest (this includes compound interest). In Quebec, it’s even stricter: the province considers a 35% annual rate of interest to be “excessive.”

Though they’re not set by the government, typical interest rate ranges for credit cards are 19.99% to 22.99% for standard credit cards, and 4.99% to 15.99% for low interest credit cards.

With such high interest rates, it’s best to pay off your holiday or other expenses costs in full. But that may not always be possible, given the constraints of inflation and rising costs of living.

“Increasing a credit card monthly payment by even a small amount will considerably shorten the time it takes someone to pay off their balance,” says Laflamme-Savoie.

Can the government regulate credit card interest rates in Canada?

The Globe and Mail’s personal finance columnist Rob Carrick started a conversation last month about the ethics of credit cards’ interest fees. With the average credit card balance in Canada at a historic high of $2,121, interest fees on credit cards are hurting Canadians who are simply trying to get by.

The government doesn’t regulate credit card interest rates. However, it is starting to intervene in certain credit card fees.

Last fall, Canadian businesses received the greenlight from the courts to charge customers for using credit cards. As businesses must pay a fee every time their customers use a credit card, they can now pass that fee onto customers instead of taking the hit themselves. This has caused an uproar among consumers (and some small businesses). The federal government is trying to reduce these fees by working with credit card companies, processors, merchants, and banks. If that deal falls through, the government can intervene and set the fees themselves.

Consumer protections for credit card users

Although there isn’t a federal body that oversees each individual credit cards’ interest rates, there are consumer protection rules.

In June 2022, FCAC began enforcing the Financial Consumer Protection Framework, which requires banks to have higher standards for sales practices. For example, a bank could be penalized for offering a premium credit card to a customer who doesn’t meet the minimum income level.

For credit cards, FCAC requires a financial institution to disclose annual interest rate(s), how interest is calculated, interest-free grace periods, and minimum payments in the document consumers receive when they get a new credit card. All the information in that document is federally regulated. So, at least you have all the information before you start using your credit card.

“Consumers have a right to receive information from federally regulated financial institutions, such as banks, about their credit cards in a manner, and using language, that is clear, simple, and not misleading,” Laflamme-Savoie says.

So, learn as much as you can about your credit cards’ interest rates and fees, and pay off your balance and interest as quickly as possible. If your fees are too high, compare credit cards and consider switching to a card with a lower interest rate.

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Sabina Wex

Sabina Wex is a writer and podcast producer in Toronto.

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