Recently, as a panel expert on Alberta Primetime where we were asked how credit card companies are able to charge outrageous interest rates of 19.5% or more. I thought this would be a great opportunity to provide my two cents.
There is no question that 19.5% interest appears to be obscene and it is very easy to point at financial institutions like the banks that make billions of dollars of profit every year as exploiters. Finance Minister, Jim Flaherty defended his reluctance to put a hard cap on credit card interest rates by saying that “This government believes in consumer choice. We are not interested, like some parties, in nationalizing banks. If someone wants a lower interest rate on a card, then they have choices and they can do that.”
I think credit card companies charge what they can get away with and rather than blame institutions for charging high interest rates, take some time an do what is in your best interest. As Flaherty said, you have choice. In my workshops, I teach people the importance of shopping around for mortgages, GICs, mutual funds, bank accounts and credit cards. I spent a couple of minutes on the internet and it was easy to find a handful of credit cards with lower interest rates. Here’s a couple of sites with a list of low interest options for Canadians
My point is simple: shop around for the right credit card for you. If you keep a balance on your credit cards, then be sure to shop around for lower interest rates. Shopping around will guarantee you less interest costs.
A little caution
One word of caution is to be careful of “low interest limited time offers.” Make sure you flag the date the low interest period ends. The credit card company knows that many people will forget the end date and start paying higher interest rates.
Also be sure to read the fine print. According to FinancingCanadians.ca, there can be a catch to a lot of promotional interest rates. For example, some banks offer a reduced rate of interest (like going from 19.5% to a promotional rate of say, 9.9%) if you transfer balances from other cards. This may sound like a great deal but most of them have a catch. For instance, if you do not charge something on the new card each and every month, the interest goes up to the regular rate of the card. Or some cards will penalize you if you make one late payment by foregoing the lower promotional rate.
Lastly, be sure to consider the annual fee as a cost as well. For example, moving from a 19.5% interest rate to 10% appears to be a good deal. But if the 19.5% card has no annual fee while the 10% card has a $150 annual fee, the 10% card may not be as attractive after taking the fee into consideration. The annual fee is a cost just like interest is a cost.
Picking the right card
The bottom line is picking the right card involves shopping around. As we have discussed, it includes a careful evaluation of the interest rate, the annual fees and also something we have not discussed, loyalty programs. Like anything, doing your homework will pay off. While this
may seem to be a message of common sense, it might be an example of how common is not common enough.
Other relevant articles
New credit card measures coming to Canada
5 tips to manage your finances and avoid debt by Financial Highway
5 Ways to pay off your credit cards
5 Reasons why people are not saving money
Time time to get rid of debt
Paying off debt might be one of the best investments you make
Credit card debt relief options that work from Canadian Finance Blog
The cost of debt: Doing the math by Balanced Junkie
Want to make a quick 19% return? by Young and thrifty
Cash back rewards preferred among Canadians by BankNerd
How to use credit card reward points by Eliminate the Muda
Found Money Trap: Don’t spend it on debt on Million Dollar Journey
PDF Related posts:
