From the looks of things, our Canadian neighbors are in the same rugged shape as the United States when it comes to COVID-19 and credit card payments. Both countries experience high unemployment, use their Reserve Banks to help shepherd residents through the storm, and foresee higher credit risks despite payment deferrals.
Quebec regulators are proceeding with a unique strategy intended to reduce consumer debt. As we reported in June 2019:
- Bill 134, passed in 2017, will eventually increase minimum payments to five percent of the balance owing.
- Under Bill 134, a provincial law passed in 2017, banks will be required to set the minimum payment at two percent of the balancing owing starting Aug. 1. That percentage is supposed to increase every year until it gets to five percent.
The world changed in March 2020 when COVID-19 became a global pandemic. Canadian unemployment is now at a record 13.7%, according to Global News Canada, on par with dismal U.S. data. Similar to U.S. issuers, Canadian banks offer deferrals to help negate the household revenue challenges.
Yet Quebec’s mandate to increase minimum credit card payments will proceed on schedule, with implementation mandated for August 1, 2020.
- The Office de la Protection du Consommateur (OPC) has put out a reminder that the minimum payment for credit cards in Quebec is set to increase starting on August 1, 2020.
- Minimum payments in Quebec will go up by half a percentage point to 2.5%. The legal minimum will go up by the same rate each year until it reaches a total of 5% in 2025. This new rule was put into law in 2017.
- The Office claims that this is to help “prevent over-indebtedness” among the public.
Quebec’s mandate to increase credit card payment due was well intended, but the timing is horrible. While the strategy does not affect the other nine Canadian provinces and three territories, do not forget that 24% of Canada resides in the Quebec province.
You can be confident that the Canadian market will feel the pain from Quebec’s test. Just as a recent WSJ article reported on similar banking challenges facing Canadian banks, the raising of the minimum due payment will take delinquency to a new stage in Canada.
Interesting idea, but poor timing! With an uncertain environment, some things should be left alone.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
