Why are credit card interest rates so high in Canada?

Credit card interest rates hover around 20%, roughly where they have been since the early 1980s when inflation and interest rates were in double digits. Canada’s inflation has averaged about 2% between 1992 and 2022, and all interest rates have declined dramatically with it except credit card rates. Even as inflation has exceeded 2.0% for the past few years, the recent back-up in other interest rates remains well below credit card rates. In fact, one has to squint to see any decline in credit card interest rates since 1980.

Let’s compare some numbers. In 1981, the interest rate on a Visa or a Mastercard was about 25%. Inflation was 12%, and the bank rate—the rate at which the Bank of Canada loans to the banking system—was a bit over 21%. The prime rate, or the rate of interest offered to a bank’s best customers, was 22.75%, so the additional charge to use a credit card was a mere 2.25%, which compensated the bank for demanding fewer income and collateral requirements relative to prime loans.

In summer 2024, credit card interest rates are about 20%, with an even steeper 23% rate for a cash advance. The prime rate for the bank’s best customers is 6.95%, putting the credit card spread at a whopping 13.05%. If you think that’s disturbing, back in the pandemic years, inflation was 2%, the Bank of Canada’s overnight rate was one quarter of 1%, and the prime rate was 2.45%. The credit card premium over the prime rate then was a staggering 17.45% compared to just 2.25% in 1981. The credit card interest rate has declined a mere 5% in forty years compared to a 20.3% decline in the prime rate marked in the depths of the pandemic, and 15.8% as of summer 2024.

Think about what an interest rate of 17.45% would do for your savings if you could get it. And bear in mind that your savings account was likely earning a fifth of a percent during the pandemic, and it’s your savings that are contributing to the funding of the very credit card balance on which you pay about 20%.

Or compare that heavenly credit card investment return you can’t get to the return on a government bond that you can get. If you were to invest $1,000 in a thirty-year Government of Canada bond at 3.3%, you would have $2,250 by 2053. Alternatively, if you were able to invest that $1,000 at 17.45% for thirty years, you’d have $124,621 by 2053.

The rates charged on credit cards are staggeringly rapacious, but many people are forced to pay them because they have no other borrowing options, at least none that come with the convenience of fewer income and collateral requirements.

The banks, in fact, prefer that you borrow against credit cards rather than take out a prime-based loan. To borrow at prime, the bank will ask for collateral, making the hurdle to a low(er)-rate line
of credit more difficult to clear than the hurdle to credit cards. They do this because they make so much more money off credit cards. OSFI (Office of the Superintendent of Financial Institutions) data show that banks make almost as much every quarter on credit cards as they do on their entire mortgage book, which has a significantly higher principal value.

More outrageous still are the high rates of interest charged to a credit card borrower who slips up and misses a payment, as I once did during a busy period of life. After missing a monthly deadline, I received a message from TD Canada Trust—the people who advertise that their customer service is like sitting in a big comfy green chair—that screamed at me in capital letters like a text from Donald Trump:

THE LAST MINIMUM PAYMENT WAS NOT RECEIVED ON TIME. IF YOU MISS ANOTHER MINIMUM PAYMENT IN THE NEXT 11 CONSECUTIVE STATEMENT PERIODS YOU WILL LOSE ANY PROMOTIONAL RATE(S) AND THE ANNUAL INTEREST RATES ON THIS ACCOUNT WILL INCREASE TO 24.99% ON PURCHASES AND 27.99% ON CASH ADVANCES.

Contrary to its claim “that banking can be this comfortable,” banking at TD Canada Trust can quickly become intimidating. The most interesting phrase in this bracing notice was “any promotional rate,” aimed perhaps at new credit card recruits who could pose a worse credit risk than existing customers.

Even if one accepts the argument that missed payments are a precursor to default, it is ridiculous to charge a 5% increase in the lending rate on two missed payments. It borders on bullying. The banks, after all, are already charging a 13% spread over the prime rate, ostensibly to absorb losses.

An obvious response to evidence of credit card gouging will be that credit card rates are no lower in the United States or other jurisdictions, and this is true. However, the United States and the United Kingdom are also highly concentrated markets. To justify one cartel’s pricing by reference to another is like your child saying everyone in class got a D, so it’s the teacher’s fault.

What’s the solution on credit cards? Apart from competition, transparency. We know that financial service fees are lower in countries with strong disclosure standards that emphasize transparency. Canada’s banks fail on transparency. Canadian consumers are left in the dark, not knowing enough to cry foul and pressure politicians and regulators to act. That has to change.

Excerpted from FLEECED: Canadians Versus Their Banks by Andrew Spence. Copyright 2024. Reprinted by permission of Sutherland House Books.

Andrew Spence is an independent financial consultant and economist. He has extensive experience in banking from time spent in Canadian and global banks. He was also an investment executive at two of Canada’s largest pension plans and was Special Adviser to the Governor of the Bank of Canada.