Regulating minimum payments on credit cards could benefit some consumers by reducing interest charges while causing others to become delinquent, a Bank of Canada study suggests.
Requiring cardholders to make higher monthly payments could help reduce consumer debt, the study said, as first reported by Blacklock’s Reporter.
“Forcing cardholders to pay more of their balance each month is one way policymakers can attempt to reduce debt,” the researchers wrote. “One reason to do this is that high credit card debt increases consumer fragility and, because interest rates are high, an increase in debt leads to large interest payments which can be a drag on economic activity.”
While there are benefits to increasing minimum payment requirements, the study said, it could also lead to “an increase in delinquency along with credit rationing.”
“How policymakers trade off these effects depends on how they measure consumer welfare,” the authors said.
The government introduced consumer protection legislation in 2019 “to prevent over-indebtedness” by increasing the required monthly minimum payment on credit cards, the study noted.
The goal was to prevent consumers from running up high balances at 20 percent interest. Before the legislation was enacted, 46 percent of Quebec credit cards required a minimum payment of less than two percent of the statement balance.
“Minimum payments were commonly as low as $10 plus interest and fees irrespective of a consumer’s statement balance,” the authors said, adding that Quebec’s legislation mandates current minimum payments of five percent of the balance.
The new law brought with it a $23 uptick in average monthly minimum payments and a 10 percent surge in delinquency.
“The effect on delinquency is less clear cut,” the report said. “Increasing minimum payments may be costly. For example it can force individuals who are liquidity constrained into delinquency.”
A TransUnion report in May found the number of Canadians paying the minimum monthly amount on their credit card rose eight basis points to 1.3 percent in the first quarter of 2024 compared to the same period last year.
“We have observed that when consumers are faced with mortgage payment shock, the impact on credit card delinquency is two to three times that of mortgage delinquency,” TransUnion director of financial services research Matthew Fabian said in the report.
“Non-mortgage debt held by homeowners is now well above 2019 levels, with at least 50 percent of outstanding mortgages yet to be repriced.”
Ninety-three percent of Canadians 18 or older have a credit card, according to government statistics.
Canada has the highest number of credit card holders worldwide, according to a survey on credit card ownership by World Bank Group. When teens as young as 15 were factored in, Canada ranked first out of the 142 countries included in the survey at nearly 83 percent.
