Cap Credit Card Rates or Educate Consumers?

If you've been paying attention to the news lately, or to the fine print on your credit card statement, you know that credit card companies are jacking up interest rates left and right. If you're part of the one-third of Canadians who can't afford to pay off their credit card balance each month, you're getting pretty fed up.

Rising interest rates

Credit card interest rates have reached an all-time high, with many in the 20-30% (or higher) range. To put this into dollars, a 30% interest rate means that you'll pay up to $1500 in interest alone on a $5000 credit card balance during the course of a year. That's roughly $125 a month that could be used to pay bills or reduce existing debt, not line the pockets of your creditor!

Credit card companies have been accused of charging exorbitant rates, particularly to those consumers who are poor, elderly, or uneducated about the true cost of credit.

The government is here to save the day?

Many feel that the government's job is to protect consumers from "evil corporations," like the credit card companies, by extensively regulating them. In fact, 82% of Canadians want to see the credit card industry more heavily regulated.

Certainly, this is the approach the U.S. is taking. President Obama himself recently put pressure on top credit card execs to reduce, or at least stop increasing, interest rates and to stop charging arbitrary fees. Additionally, the U.S. Federal Reserve passed regulations that will crack down on unfair, deceitful practices like upping rates without warning. Fed Chairman Ben Bernanke describes these new credit card regulations as "the most comprehensive and sweeping reforms ever adopted."

Problem is, the rules don't take effect until July 2010, and guess what the credit card companies are doing in the meantime? That's right, raising interest rates.

Canada's approach

The Canadian legislation that's currently on the table isn't as aggressive as recent U.S. initiatives - it won't cap the interest rates charged, for instance. Canadian efforts seem to be aimed more toward educating consumers about the dangers of credit. Finance Minister Jim Flaherty is advocating consumer education through mandated large-font disclosures about interest rates on monthly credit card statements. These disclosure requirements will help consumers to understand the true cost of credit.

Many are calling this approach too soft, but I'm of the opinion that the government getting involved in a private sector industry usually makes things worse. Visa, MasterCard, and others have threatened that heavier regulation will only result in increased costs for consumers. And I believe them. No amount of legislation, no matter how tightly woven, will be without its loopholes. And where there is even the tiniest loophole, there the credit card companies will be to take advantage of it.

Reduced reliance is the key

The only true cure for high interest rates isn't increased government regulation, but rather reduced consumer dependence on credit in the first place. By taking on more debt than we can afford to pay back, we're at the mercy of our creditors. But by using credit wisely (i.e. not for items we can't really afford and don't really need), we can take the power back.

Of course, there are circumstances in which turning to credit is a necessity. We're not all just blindly whipping out our plastic to buy plasma TVs and expensive pieces of furniture. Unforeseen medical expenses come up, layoffs happen, cars break down...This is why it is so important to build up an emergency savings fund. Life is full of surprises, and you don't want to have to pull out your credit card each time to foot the bill.