Credit card companies will be forced to give customers a three-week grace period for interest on credit card purchases, one of several new industry regulations announced by Finance Minister Jim Flaherty on Thursday.
"Federally regulated credit card issuers will have to provide consumers with a minimum 21-day, interest-free grace period on all new purchases when the consumers pay their balance in full by the due date," he said at a Toronto news conference.
Flaherty said that most credit cards currently offer 15-to-24 day grace periods, with the majority offering the three-week grace period required under the new regulations.
But many of these companies also charge consumers on the interest that accrues during the grace period, he said, even if their balances are paid in full that month.
This can also be true if a consumer carries a balance from one month to another.
"If a consumer carries a balance from one month to another, some cards give that consumer essentially no grace period on new purchases," Flaherty said.
"They charge interest on the full balance immediately on both the previous balance and the new purchases."
Later in an interview on CTV's political affairs program Power Play, Flaherty hinted the new measures were a tough sell to the credit card companies.
He said the profits they made from accrued interest were "very substantial."
"It has been profitable for some of the financial institutions the way the calculations were being done. And we wanted to ensure a clear 21 day grace period uniform for all the financial institutions, which is a cost for them," Flaherty told CTV's Tom Clark.
Flaherty also hinted that the government is keeping an eye on other cards.
"We also have issues coming down the road with respect to debit cards as well," he said.
The grace period is one of several regulations the government announced.
Another major change is that credit card companies will have to print "all salient information" in a summary box on monthly statements, clearly showing the annual interest rates for purchases and cash advances.
"This will improve clarity and move this information out of the fine print," Flaherty said.
The new information box must also contain the credit card's annual fee, information that is often missing on current credit statements.
Flaherty said the same summary box must also give consumers an indication of how long it will take them to pay off their balances if they stick to paying only the minimum monthly payments required by the credit card companies.
"This will help consumers get a truer picture of their debt-load as they pay it off and manage their affairs," he said.
Credit card companies will also be expected to follow several other new regulations, including:
- Credit card companies will require the "express consent" of consumers in order to raise their credit limits
- Consumers will not have to pay over-the-limit fees due to merchant holds / pre-authorization holds
- Credit card companies will be required to give consumers advance notice of interest rate increases on monthly statements, if such increases will occur during the next statement period
- Consumers will also get advance notice when low, introductory interest rates are about to expire, or when a penalty rate will be imposed due to late balance payments
- Credit card companies will be restricted in the time periods in which they can hound contact consumers for debt collection
- All payment allocations to credit card companies should be applied in favour of the consumer
The new regulations, however, will not cap the interest rates that credit card companies impose on consumers.
"We have choice in credit card interest rates in Canada," Flaherty said, explaining the government's position on the matter.
"There are some low interest rates on some of the credit cards. There are dozens and dozens of options for consumers."
Instead, Flaherty said the government's concern is to ensure that consumers have "easily available, clear information so that they can make informed choices about what credit card suits them and the cost of that credit card for them."
Flaherty said the changes were part of the Conservative government's plan to improve the financial literacy of Canadians.
"With better information, Canadian consumers will be able to make better decisions, but only if they are equipped properly to do so," he said.
