Beyond The Commons

 Beyond The Commons

Aaron Wherry covers all the goings-on in and around Parliament Hill. Follow Aaron on Twitter: @aaronwherry

Categories: Beyond The Commons, Capital Read

Policy alert

by Aaron Wherry on Tuesday, March 29, 2011 1:42pm - 53 Comments

Jack Layton promises a cap on credit card rates.

The first policy announcement from the NDP campaign would allow the federal government to regulate credit card interest rates so that they could not be any higher than five points above the prime rate, which the Bank of Canada has currently set at three per cent. That would mean credit card companies could not charge more than eight per cent interest on the monthly bill — the same idea the NDP put forward on the 2008 campaign trail and then introduced in a private member’s bill last year.

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  • alfanerd

    Not that it's sensible to discuss this as if there was a chance of it being implemented, but this would only take away credit cards from the poorest members of our society. Maybe it's a good thing, maybe they need protection from themselves, but Im sure that's not what the NDP wants. They might as well make all pay-day loan shops illegal too.

    • David_Nicholson

      It makes me sick everytime I see a pay-day loan shop. I used to catch my bus in front of one that advertised 500% effective rate of interest. This is a business that preys upon desparate people. The number of them I see around town tells me there are a lot of desparate people in this country; the government should help the poor so they don't need to borrow money at 500% to survive.

      • alfanerd

        yes indeed. there are so many on my way to work, it really is depressing. but if somebody is poor and uses these shops to get by regularly, im not sure what the government can do. the government cant cure stupidity.

        • FVerhoeven

          "the government cant cure stupidity."

          You know, I think about that sometimes, if indeed they could or could not.

          Sometimes I'm thinking, and this is just a thought: what if schools would teach the basics such as reading, writing and math, and would then also put emphasis on teaching the technique of learning how to make choices. Because learning to make choices, real choices, is often not done. At least not in a school setting.

          And if the real practice of making choices is sometimes no longer learned at home, where then do some people gain the skills for knowing what it means to make real choices?

          Some circumstances of the very poor leave them with very few choices or no choice at all. I believe that.

          But it can also be said, because it is also true that some people end up poor because they are not able to make choices, or don't understand the making of choices properly.

          • JamesF

            Beyond that this would encourage people to take on more debt (a concept I generally oppose) what's to stop financial institutions from jacking up interest rates on other (more affordable) forms of credit in order to make up the profit shortfall?

            I don't think the market would respond to this the way Mr. Layton thinks it would (which is, near as I can tell, by taking it on the chin).

          • alfanerd

            i agree.

            but schools cannot replace good parenting.

            making good choices in life is about much more than simply knowing what is the good choice. it also has to do with being willing to make the good choice.

            more often than not, that requires being raised in a loving family, preferably with both a mom and a dad.

        • criselis

          It may not be stupidity but that they have a child at home who is hungry and their two part time jobs don't pay enough to get by on and the food bank in your community ran out mid way through the week. Rarely is poverty a lifestyle choice and with high unemployment and a part time job recovery even hardworking smart people may not be able to make ends meet.
          What I want to see from my government is a cure for poverty. But that would take leadership that is sorely lacking these days.

          • alfanerd

            no it may not be stupidity but using these payday loans frequently IS stupidity, because it only pushes you deeper into poverty.

            using it once, here and there, when bad situations arise, that's not stupid. but using it often, is immensely stupid.

            by the # of these places, im guessing the vast majority of their business stems from stupidity.

            You want your government to cure poverty? That's not within the governments power Im afraid. The best the government can do is to give businesses the right conditions in which they can thrive, and hire more people. That means low taxes, and getting out of the business' way.

          • criselis

            I believe we as a society when we come together – government – can do so much more than "…give businesses the right conditions in which they can thrive, and hire more people."

            But I know you don't agree with that.

      • jonatwitan

        The first thing I noticed when I moved from Calgary to Hamilton was how many more PayDay Loan stores there were here, especially in and around downtown. I agree, they are a sad sight.

        • OriginalEmily1

          They counted on Hamilton steel, and manufacturing, to last forever.

  • Andrew (not PorC)

    The only problem is that this will reduce the amount of credit available to Canadians. For what it's worth, I don't think this a bad thing. But basic economics dictates that if you put a binding ceiling on prices, demand will exceed supply. Maybe the NDP are okay with reducing the credit available to Canadians–they should be upfront about the consequences.

    • FVerhoeven

      I like this post, because there are good and bad things to be said about credit card rates.

      But I don't know if it would be possible to be up front for Jack, because I think it would be difficult to see beforehand what consequences exactly those changes to imposed rates might bring about. Sometimes one cannot tell such things in advance, because other factors not incorporated at first thought might become a very dominant consequence.

  • s_c_f

    The obvious consequence of this idiotic policy is that credit cards would become very hard to get, and many people would lose the ones they have. Too many people are too much of a bad credit risk to be able to cap their rates at 8%. Most of these people would no longer have access to credit, thanks to the NDP.

    You can picture it now… After they wrecked the credit market, they would likely start a government operated credit agency to fill in the massive hole they created, which would then proceed to wreck the government's finances since the 8% cap would cause the government agency to go billions in the red.

    • noob_goldberg

      I don't disagree with your listed outcomes, but would reduced access to credit cards be a bad thing? Are personal credit cards a necessary component or our economy? What would the impacts be of reduced credit card availability?

      Why am I using so many question marks?

      • s_c_f

        "Are personal credit cards a necessary component or our economy?"

        Not much is a necessary component. Cars aren't. Asparagus is not. It doesn't matter.

        Credit cards are very useful. I've used credit cards many time and will continue to do so.

        "What would the impacts be of reduced credit card availability? "

        People who wish they had one would not. Life would be more difficult. It's the same for any product. Why do we buy things? I like credit cards. So do other people. They're useful.

        If some people don't handle them well, so what? Some people who buy booze are alcoholics. Some people who buy cars are reckless drivers. Individuals are responsible for their own behaviour. Just because some people won't pay back their debts (and thus must resort to high rates), that doesn't mean we should treat them like children. They can still have access to credit, but the creditor must charge high rates to compensate for those that won't pay back the money.

    • SirJohn_Eh

      There are a vast number of "guaranteed credit cards", where you basically have a debit card that you have "loaded" money into in advance. If you can't get a credit card (in the very unlikely possibility of a market where this policy has been implemented) there is probably a valid reason why you shouldn't have one. However, these guaranteed cards are a way around the barriers of needing a credit card for such things as reservations, online purchases etc.

      • s_c_f

        More nanny statism. That's not for the government to decide. That's for creditors and debtors to decide.

        If the creditor wants to lend it, and the debtor wants the loan, they why in heck should the cops get in the way? Gambling is legal. But credit should not be legal for some people?

        As for debit – sometimes people want credit because they want credit. In other words, the prime reason for getting credit is that you don't have the money.

        • SirJohn_Eh

          I am not one to advocate that governments should protect people from their own mis-judgements when all the info. to make an informed decision is available. Note though that no government would be deciding who gets credit cards if Laytons policy came into being – it would be an uninteded consequence of an NDP party that hasn't seemed to put the effort into understanding the motives and workings of private corporations. Also, I am sure this would tighten up the margins of profit in the industry and benefit those that are credit worthy at Prime + 5. However, the argument that many will be inconvenienced is weaker knowing that a "credit card" is available to all no matter the credit rating you have – you just have to save in advance and put more effort into getting the priviledge of having credit.

          • s_c_f

            "you just have to save in advance and put more effort into getting the priviledge of having credit"

            I disagree. Getting credit is not like getting a degree. It should be available to all. It's not a privilege. It's a contract between two people of sound mind who both wish to enter into the contract. It's a tool, not a reward.

      • Jenn_

        Actually, while I'm sure that's why they were invented, so many places online, or for reservations, won't take them. I've never really paid attention since I don't have one of those, but I have noticed the little blurbs when I go to pay.

  • John D

    The prime+5%number can be debated (that seems too low to me), but I do support the principle. 30% interest rates are criminal and serve to push the poor deeper in debt. When you factor in low inflation it's even worse.

    • FVerhoeven

      I agree John. Even 20% borders being criminal.

      Of course one should not overspend by putting all purchases on credit cards, but come on, we all know we have to some times, and besides, credit cards are handy to have. But even at lower interest rates, the cards would still be profitable for banks

  • PeteTong

    I don't know why people feel compelled to make purchases on their credit card when they cannot pay off their balances each month. This will have the effect of encouraging people to take on more debt.

    • sine_ingenio

      Ever have to replace a transmission? Ever have to get home to care for or see off a loved one? Sometimes the alternatives are worse than sucking up a bit of interest. But 30% when the money is costing <1%?

      Maybe there could be an insurance fund to cover any bad loan losses.

      • PeteTong

        Good point, people have unforeseen expenditures, but racking up credit card debt to deal with unforeseen expenditures is the worst form of personal financial management.

        • Mike T.

          It could be the worst form but it may be the best available.

  • john g

    Horrible. Horrible. Horrible.

    This would either destroy the credit card market, or drive the prime rate to 15%. Banks would be forced to restrict the granting of credit cards to those whose credit is good enough to qualify them for prime + 5.

    Does Layton think that the banks are just going to put up with high risk defaulters for 5% above prime? Hell no. They'll just cancel their credit cards.

    • Charles

      If the prime rate were 15%, it would actually be worthwhile to save. With prime rates approaching zero, savings accounts have return rates less than the rate of inflation.

      Not saying I think 5% is the right number here. But 10% might be.

      • madeyoulook

        Prime rates and inflation rates are not the separate beasts you seem to be inferring, here.

  • SanDiegoDave

    Excellent points on this post. At this time I believe my vote is going to go to the party whose policies have the fewest unintended consequences. This may categorically exclude the NDP from any consideration.

    • Thwim

      Voting Rhino, are you?

  • madeyoulook

    This one is so stupid, it could only have come from the NDP.

    I believe the US Congress did some peacock-strutting over helping the little guy against the evil banks over credit cards. And, as discussed above, credit cards were cancelled by the banks and more and more families ended up in the pawn shops and the super-short-term loan market.

    Dumb, dumb, dumb. Typical. But dumb, dumb, dumb.

  • Dan

    I wonder if the NDP would be willing to use its own money to provide unsecured loans to high risk borrowers at prime plus 5%?

  • Style

    Why do so many commenters here think it would be a bad thing if this made credit card companies more responsible with their lending? If you're worried about access to credit for vulnerable populations, there must be ways to provide that without relying on reckless banks and payday loans.

    • s_c_f

      "if this made credit card companies more responsible with their lending?"

      They are responsible. That's why they charge the high rates to some people. If you can't get a lower rate, that's because you've frequently stiffed your creditors. They charge a rate based on the chance that the individual will default. They're not a welfare agency. They're a credit company.

      • Style

        Oh, I didn't realise those pre-approved credit cards arrived only after extensive investigation of your credit history…Sent from my BlackBerry device on the Rogers Wireless Network

        • s_c_f

          Try responding to what I wrote, not your imaginary straw man.

          • Style

            You've suggested that high rates are based on an individual's credit history. I'm pointing out that some cards are issued with no knowledge of an individual's credit history. The banks are not competing on price, they're competing on ability to draw in unsophisticated borrowers. Your welfare agency comment is nonsense. Nobody is suggesting that financial institutions should be forced to lend to anyone. The proposal is to cap the amount that can be charged on credit cards. That will change how credit cards are issued and probably improve the personal debt loads of Canadians, partly by making financial institutions more sensitive to the actual risk profile of borrowers.

          • s_c_f

            "Your welfare agency comment is nonsense. Nobody is suggesting that financial institutions should be forced to lend to anyone. Nobody is suggesting that financial institutions should be forced to lend to anyone."

            No, that's nonsense. If you limit the credit rate, then you are essentially forcing lenders NOT to lend to someone. So then you either deny people credit entirely, or you given them credit cards anyway with rates they don't deserve, effectively turning a credit agency into a welfare agency.

            "I'm pointing out that some cards are issued with no knowledge of an individual's credit history."

            Those are not credit cards. They key word is "credit". All credit requires some sort of analysis to determine the risk of default.

          • Style

            But nobody is requiring that credit cards be issued to anyone. That's just a strawman you've made up. There are pre-approved credit cards which are different from pre-paid credit cards. You might not see many of them while we're flirting with a recession but they'll come back with an economic recovery. And their excistence suggests that the credit card market is not one of information-seeking banks competing on price to serve consumers who possess perfect information.Sent from my BlackBerry device on the Rogers Wireless Network

          • s_c_f

            The fact is, you want to deny credit cards to everybody except the people that need them the least.

            You're making no sense.

            I'm not sure what the heck you're talking about with this pre-approved nonsense, but you're either talking about debit cards, or you're talking about pre-approved offers, which essentially mean nothing! There's no such thing as pre-approved credit, unless you're talking about the credit limit, which is not the same thing as the interest rate. All credit has an associated interest rate (unless it's Islamic credit, in which case they do a few tricks to mimic the interest rate, but it's actually the same thing).
            http://www.askmen.com/money/investing/26_investin…

            You don't seem to understand what "credit" is.

          • Style

            You are confusing pre-approved with pre-paid. You are also confusing paying a high interest rate with having a high need for a credit card. Sent from my BlackBerry device on the Rogers Wireless Network

  • Leo

    Elizabeth Warren is doing a great job. If you have time, her lecture on America's credit economy is excellent.

    The Coming Collapse of the Middle Class
    http://www.youtube.com/watch?v=akVL7QY0S8A

    • noob_goldberg

      I've had a crush on EW for a few years now, but I think the Obama administration is really sidelining her lately, unfortunately. She's doing the best she can with the power that's been given her, but she's definitely been kept on a short leash. :(

      I have less and less patience for the Obama administration. It's been a cascade of blown opportunities.

  • Leo

    Best comment from the Star article, lol!!!

    "I wonder how many air miles Jack and Olivia racked up when they spend over $1,000,000 last year for their expenses living the good life up in Ottawa. Fighting for the little guy while gorging at the trough."

    • s_c_f

      I wonder how often they use a credit card to book their flights. If Layton wants this policy, he should cut up his own credit cards and see what life is like without them.

      • Mike T.

        With a six figure salary, Layton's access to credit will not be cut off by controling rates.

        • s_c_f

          That's irrelevant. If he wants to take away credit from other people, he should try it himself and see how it feels. Or are you saying he just likes to stiff the little people?

    • Thwim

      Ah.. I see you've stopped putting arsenic into the well and are now going straight for the cyanide.

  • madeyoulook

    Well, ok, but just to show that I wasn't hallucinating:
    Payday Lending Booms as Credit Cards Become Less Available
    http://volokh.com/2010/12/24/payday-lending-booms…

    • noob_goldberg

      He may still yet be proven correct. It's still early days.

  • madeyoulook

    Aaron, this Policy Alert has not yet received the same volume of comments as your previous ones have, but I want to thank you for sharing us the POLICY debating points of this campaign. And for highlighting them specifically the way you have.

    So often, we chastise the media for sharing just the fluff and the stumbles without giving us citizens the policy details we should be handling. And the media retort that this is because its audience doesn't want policy. I submit that, at least here at Blog Central, the flurry of discussion shows the hunger for real honest-to-goodness policy ideas to bat around. And the country is better off when more of this happens. So thank you.

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