Demystifying the economy | The key rate is falling, why not that of my credit card?

Every Saturday, one of our journalists answers, along with experts, one of your questions on the economy, finances, markets, etc.

The reduction in the key rate certainly brings relief to people who have taken out a variable rate mortgage loan, as well as to those who are preparing to borrow. Why aren’t credit card holders entitled to the same pleasure?

It is true that over the past five years, we have gone through a pandemic, an increase in interest rates, a plateau, and then, since last June, a decline. Meanwhile, credit card interest rates have remained relatively stable. There is reason to ask questions.

First, credit cards generally have a fixed interest rate, underlines Carlos Castiblanco, economist and analyst at Option consommateurs. “It is already established in the conditions of the agreement, so it is not influenced by variations in the Bank of Canada’s reference rate,” he explains.

There are still a few exceptions. For example, a few years ago, TD Bank offered a variable interest rate credit card based on its prime rate (which is 5.95% at the time of writing), to which an additional percentage was added. according to the evaluation of his credit file (5.5% in the best case, 13.75% in the worst). It is no longer offered to new customers, but those who had subscribed to it and who still use it actually see their interest rate go down when the key rate is lowered.

Even with one of these rare variable rate products, you end up with an interest rate that is generally higher than that which comes with other types of loans. As of August 2024, the average interest rate on issued and existing credit card loans was 20.55%, according to Bank of Canada data. This is far from the average interest rate on a mortgage loan, which varies between 3.08% and 8.85%, depending on the scenario.

With a mortgage or car loan, it’s quite the opposite: the bank can seize the house or car in the event of default.

“To compensate for the higher risk, interests also tend to be higher,” summarizes the economist.

Regulation

Personal lines of credit, another type of borrowing without collateral, generally have lower interest rates than credit cards. As of August 2024, the average interest rate on unsecured personal lines of credit loans was 10.45%. For what ?

” Normally [l’attribution de cette marge] has more to do with the relationship that the client has with the financial institution,” underlines Mr. Castiblanco.

Getting a line of credit is more complicated than getting a card, which can often be done simply by filling out a form. The financial institution is therefore better able to assess the degree of risk it takes in making this loan. “A credit card, it’s very easy for the bank to think it’s going to be a loss,” he says.

Over the years, the rate granted to credit card holders does not vary much. Difficult for issuers to increase rates because they are much higher than other credit options. And it is also difficult for them to decide to lower them, because of the risk involved, says Carlos Castiblanco.

The Option consommateurs organization is also calling for more regulation to govern the interest rate on credit cards.

“The rates can be very, very steep. At 20% on purchases and sometimes 23% for cash advances, it can be a good tool that allows people to build their credit score, but it also leads to debt, and many are not aware of it. implications behind a credit card,” he raises.

Reminder: after a grace period of 21 days following the issuance of the credit card statement, interest begins to accrue. In the case of cash advance, there is no grace period.

The minimum monthly payment is 5% of the balance. If not made, the interest rate may increase, depending on the terms of the credit card.