The Canadian province of Ontario recently took action to reduce cardholder debt was a well-intentioned concept. Mercator Advisory Group’s new report on the market noted six market innovations in Canada, with a particular interest in Ontario’s plan to increase the minimum payment to help reduce consumer cost. Instead of the typical U.S. minimum payment of approximately 1/36 of the balance due (roughly 3%), Ontario citizens would be required to pay 5% by 2025 for existing credit card debt. New cards booked are mandated to use the new standard immediately.
Good idea for household budgeting, but the timing could not be worse as the world attempts to counteract the financial implications of COVID-19. We have yet to see the province or the Canadian Parliament countermand this change, however as the economy erodes, a switch will likely be in order.
Change is coming. The top issue today in credit cards is figuring out the bigger picture. Discretionary spending is down, as Visa noted in SEC filings. Credit card lending is down, as the WSJ reported on significant issuers. Customer service units at all major banks report long hold times, and collection units are operating on their never-expected-to-be-used contingency plans.
Mercator has a vision on how the changing market will affect the design of the credit card in the future, but we are internalizing the thought until the dust begins to settle on the COVID-crisis. The consideration now is how the market will react, and for that, we shift to the U.K., where Moneywise provides a view on high street banks.
- Borrowers face paying more to make minimum credit card repayments as several high street banks changed their deals over the last week, according to Moneyfacts.
- Halifax, Lloyds Bank and Bank of Scotland have increased the minimum monthly repayments on all credit cards from the higher of 1% of your total debt, or £5, to 2.5%, or £5.
- MBNA has also increased the minimum repayments on its credit cards from the higher of 1%, or £25, to 2.5%, or £25.
The 1% standard referenced by MBNA should never be that low because rates can undergo negative amortization unless you carry the balance without interest. The math is simple. You need to have the scheduled payment diminish the balance, or you will never extinguish the debt. And you need to cover the interest, or you will have negative amortization. Negative amortization means that the balance will go up, not down, after payment.
Offer Terms Change
Another interesting trend coming out of the U.K. is a reduction of long term introductory offers. You can count on this coming to the U.S. market soon.
- A number of high street lenders have reduced the interest-free terms on their credit cards or withdrawn products altogether.
- The Sainsbury’s Bank Dual Offer Credit Card previously offered a market-leading 0% interest term of 27 months. This has now been reduced to 26 months.
- The bank also reduced the interest-free period on its Balance Transfer Credit Card from 29 months to 28 months, while also increasing the balance transfer fee from 2.74% to 3%.
- Similarly, Tesco Bank reduced the interest-free term on its Clubcard Credit Card from 28 months to 26 months.
- It also removed the three-month 0% interest purchase term on the card as well as reducing the 0% money transfer term from 28 months to 12 months.
And Watch Out for Credit Line Reductions
- Bank of Scotland, Halifax, and Lloyds Bank have reduced their maximum personal loan limits from £50,000 to £35,000.
There will be many changes once life normalizes. While the shock to the system is current, deeper issues will exist as credit cycle agings continue. For now, look for term changes on minimum dues, intro offers, and reduced lending—lots of changes to come.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
