The federal government says it is acting to protect consumers with its new credit card rules, but Canada’s big banks warn that these rules will cost the financial services institutions hundreds of millions of dollars.

Despite providing plenty of advance warning of the proposed changes this past May, the recent introduction of new credit card regulations on such things as a minimum grace period and interest rate disclosure has been met with a hostile reception from banks, which say that about 70% of cardholders pay off their balances every month.

The banks argue that a financial crisis is the worse time to introduce such measures. “These regulations will be costly and complex to implement,” says Maura Drew-Lytle, a spokeswoman with the Canadian Bankers Association. “And, rather than providing greater clarity, they may make credit card statements more difficult to read.”

The CBA also warns of “a negative impact on consumers” as a result of the new rules. “For example,” says Drew-Lytle, “the regulations may limit the banks’ ability to provide some of the services customers have come to expect, limit the number of credit card options and may reduce credit availability to some customers.”

Most of the rule changes take effect on Jan. 1, 2010, with the exception of a new, mandatory minimum 21-day interest-free grace period on new credit purchases when a customer pays the balance in full, which comes into effect on Sept. 1, 2010. (Currently, federally regulated credit card issuers have the flexibility to set their own grace periods, which typically range between 15 and 26 days.)

As of Jan. 1, card issuers will be required to:

> Provide a summary box on credit contracts and application forms that lists key features, such as interest rates and fees.

> Inform consumers of how long it would take to repay their balances in full if they make only the minimum payment every month.

> Lower interest costs by mandating allocations of payments in favour of the consumer. In cases in which different interest rates apply to different amounts owing for a particular billing period (such as when a consumer takes a cash advance vs making a purchase, which are often subject to different interest rates), it is required that consumer payments in excess of the required minimum payment be allocated using one of the following two methods: either to the outstanding balance with the highest interest rate first, or in the proportion that each outstanding balance has relative to the total outstanding balance.

> Eliminate over-the-limit fees arising solely from holds placed by merchants. (Gas stations and hotels frequently place holds on credit cards, which can remain for several days and which can push consumers beyond their credit limit.)

> Obtain express customer consent for credit-limit increases.

> Limit certain debt-collection practices that financial institutions can use to collect credit card debt.

> Provide advance disclosure of interest rate increases prior to them taking effect, even if this information is included in the card contract.

“It is a good thing for the consumer,” says Patricia Lovett-Reid, senior vice president with TD Waterhouse Canada Inc. in Toronto, of the changes. She notes that credit cards can act as “financial weapons of mass destruction” when used improperly. “That is exactly what happens when you increase a client’s credit limit without telling them.”

The stipulation for credit card contracts and applications to contain a summary box outlining information on rates and fees and how long it would take to pay off a balance will be particularly powerful, Lovett-Reid says: “That’s important because I get the feeling sometimes people don’t understand how time and compounding kills your financial plan when you owe money, and this will show it.”

Frank Wiginton, a certified financial planner with TriDelta Financial Partners Inc. in Toronto, is also supportive of clearer disclosure of rates, limits and how the lenders apply payments: “I think the government has done a good job in giving the cardholders information of where the payments go.”

Card companies “are already charging outrageous, outlandish interest rates,” he adds, “considering that right now the Bank of Canada has kept interest rates at 0.25% — the lowest in 30 years — and credit card rates haven’t changed at all.”

That said, Wiginton points out that the changes will be of limited benefit to credit card abusers: “The people who get into trouble with grace periods are not the people who are paying the full balance — [the latter group] are not getting any grace period. I don’t fault the credit card companies for [their objections]. It is their money that is being used to pay the merchants because people aren’t paying in full.” IE