Coming Soon: Financial House Arrest

debtor prison

With the new deflationary environment we now find ourselves in, recently confirmed in late January with the drop in the Bank of Canada’s overnight rate (along with the potential of a further cut in mid-April), banks are now scrambling to find creative ways to goose a little more margin out of trapped and indebted Canadian consumers to shore up earnings as they face ongoing headwinds due to the impact of decreasing interest rates, weak oil prices and a slowing domestic economy.

An interest rate of 21% sounds high but it will seem like a bargain to some Toronto-Dominion Bank credit card customers when it climbs to 24.99% at the end of March.

Credit card debt has always been among the most expensive ways to borrow, largely because it is unsecured and traditionally comes with a much higher default ratio.  Three months of not making payments puts you in arrears. That type of non-payment will also put a bulls-eye on your head as TD will now charge the higher interest rate when the minimum payment is 30 days past due on its TD First Class Travel Visa Infinite card.

Customers are notified in their next statement that they have missed that minimum payment and must pay up or higher rates will be in effect on the next payment cycle – in other words, two missed payments in a row and the rate goes up. It climbs to 27.99% from 21% for missed payments on cash advances.

CIBC is following suit, increasing its Aerogold Visa interest rate to 24.99% on purchases; and to 27.99% on cash advances, if the cardholder does not pay the minimum balance in two consecutive payment cycles.

As for the percentage of delinquent credit cards according to Equifax, it was 3.5% at the end of the third quarter.  Credit card delinquencies peaked at almost 5% in 2008.

Although actual debtor prisons are a thing of the past many Canadians, who have unwittingly bought in to the easy, cheap money propaganda of the finance sector over the last 5 years, will soon find themselves under the proverbial equivalent of “financial house arrest” in due course.