Interest rates on bank cards are around 20%, concerning the same level for the reason that early Eighties, when inflation and rates of interest were within the double digits. Canada’s inflation averaged about 2% between 1992 and 2022, and all rates of interest have fallen dramatically because of this, apart from bank card interest. Even though inflation has been above 2.0% lately, the recent increase in other rates of interest stays well below bank card rates of interest. In fact, you may have to look closely to see a decline in bank card rates of interest since 1980.
Let’s compare some numbers. In 1981, the rate of interest on a Visa or Mastercard was about 25%. Inflation was 12% and the bank rate of interest – the speed at which the Bank of Canada lends to the banking system – was just over 21%. The prime rate, which is the rate of interest offered to a bank’s best customers, was 22.75%, so the extra fee for using a bank card was only 2.25%, which compensated the bank for being in comparison with top ones Loans required lower income and collateral requirements.
In the summer of 2024, rates of interest for bank cards will probably be around 20%, and for a money advance it’s an excellent higher 23%. The key rate of interest for the bank’s best customers is 6.95%, which puts the bank card spread at a whopping 13.05%. If you discover this troubling, in the course of the pandemic years inflation was 2%, the Bank of Canada’s federal funds rate was 1 / 4 of 1%, and the federal funds rate was 2.45%. The bank card premium over the bottom rate was an incredible 17.45% on the time, in comparison with just 2.25% in 1981. The bank card rate of interest has only fallen by 5% in forty years, while the bottom rate has fallen by 20.3% pandemic and 15.8% in summer 2024.
Think about what a 17.45% rate of interest would do to your savings when you could get it. And remember, your savings account probably earned a fifth of a percent in the course of the pandemic, and your savings are helping to fund the very bank card balance you are paying about 20% on.
Or compare the heavenly return on a bank card investment which you could’t get to the return on a Treasury bond which you could get. If you invested $1,000 in a 30-year Canadian government bond with an rate of interest of three.3%, you’ll have $2,250 by 2053. Alternatively, when you could invest that $1,000 at 17.45% for 30 years, you’ll have $124,621 by 2053.
The fees charged on bank cards are shockingly high, but many individuals are forced to pay them because they don’t have any other credit options, no less than none that include the convenience of lower income and collateral requirements.
In fact, banks prefer to borrow through bank cards fairly than taking out a first-rate loan. In order to take out loans at first-class conditions, the bank requires collateral, which raises the hurdle for a line of credit with lower rates of interest
The credit rating hurdle is harder to beat than the bank card hurdle. They do that because they make so far more money with bank cards. OSFI (Office of the Superintendent of Financial Institutions) data shows that banks make almost as much each quarter on bank cards as they do on their entire mortgage book, which has a significantly higher capital value.
Even more outrageous are the high rates of interest charged to a bank card borrower who makes a mistake and misses a payment, as I once did during a busy time in life. After missing a monthly deadline, I received a message from TD Canada Trust – the individuals who advertise that their customer support is like sitting in a giant, comfortable green chair – that screamed at me like one amongst caps SMS from Donald Trump:
