Credit card interest rates are hovering around 20%, roughly where they've been since the early 1980s when inflation and interest rates were in the double digits. Canadian inflation has averaged about 2% between 1992 and 2022, and all interest rates have fallen significantly with it except credit card rates. Even as inflation has exceeded 2.0% in the past few years, the latest copy of some interest rates remains below credit card rates. In fact, one has to squint to see any drop in credit card interest rates since 1980.
Let's compare some numbers. In 1981, the interest rate for Visa or Mastercard was around 25%. Inflation was 12%, and the bank rate—the rate at which the Bank of Canada lends to the banking system—was over 21%. The prime rate, or interest rate offered to the bank's best customers, was 22.75%, so the additional charge for using the credit card was just 2.25%, which compensated the bank for requiring less money and collateral requirements compared to the original loan. .
In the summer of 2024, credit card interest rates are around 20%, with a 23% increase in cash-advance rates. The bank's prime customer rate is 6.95%, making the credit card spread 13.05%. If you think that's disturbing, back in the pandemic years, inflation was 2%, the Bank of Canada's overnight rate was one quarter of 1%, and the prime rate was 2.45%. The credit card interest rate above the prime rate at that time was a staggering 17.45% compared to just 2.25% in 1981. Credit card interest rates have dropped just 5% in four decades compared to a 20.3% drop in the first rate marked down. of the epidemic, and 15.8% from the summer of 2024.
Think what 17.45% interest would do to your savings if you could get it. And remember that your savings account may be earning a fifth of a percent during a pandemic, and your savings contributing to the credit card balance you're paying off is about 20%.
Or compare that heavenly credit card investment return you can't get to the government bond return you can. If you were to invest $1,000 in a thirty-year Government of Canada bond at 3.3%, you would have $2,250 in 2053. Alternatively, if you were able to invest that $1,000 at 17.45% for thirty years, you would have $124,621 in 2053. .
The rates charged by credit cards are incredibly bad, but many people are forced to pay them because they have no other means of borrowing, at least none that come with the convenience of fewer income and collateral requirements.
In fact, banks prefer you to borrow credit cards rather than take out a loan. To borrow initially, the bank will ask for collateral, making the barrier a low-level(er) line.
of debt that is more difficult to clear than the limit on credit cards. They do this because they make a lot of money with credit cards. OSFI (Office of the Superintendent of Financial Institutions) data shows that banks make about as much money each quarter on credit cards as they do on the entire loan book, with the highest principal amount.
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