Tuesday, March 29, 2011

An Interesting Look at the NDP's Credit Card Policy

I didn't even think of it this way, but the guy who runs Canadian Election Watch has a point:
NDP: Wants to cap credit card interest at prime+5% (8% currently) and to regulate credit card transaction fees. Just the interest rate cap will nab something on the order of $10 billion from credit card companies. Think about how much we'll all save - a wonderful free lunch! Whaaaa?

The credit card industry may generate high profits, but it also requires lots of capital. The question is how much excess profits it generates - i.e. profits over and above what all that capital would generate if invested elsewhere. The answer is, most probably, much less than $10 billion. After all, if offering cards were that profitable, banks would be falling over each other to give cards with better terms in order to attract more customers.

If only credit cards with 8% interest and low transaction fees can be offered, then:
1. there will be a lot fewer of them;
2. those that exist will have little or no rewards, and high annual fees.
Canadians will then have two choices:
- pony up that big annual fee up front; or
- use debit, keep checking their chequing account balance to make sure balance doesn't run low, and go through the hassles and uncertainty of getting a personal loan when a little extra is needed. 
My guess is that few would choose the former option, so the NDP proposal would essentially kill credit cards in Canada. Most Canadians would simply end up losing the convenience of revolving credit and probably paying a bunch of extra bank fees instead of credit card interest. The NDP is probably smart enough to know this. Part of the party may even think that getting rid of credit cards is a good thing, though I would hope that the majority is not that paternalistic. Most likely, they are banking (probably rightfully so) on enough Canadians being na├»ve enough to support this policy, knowing full well that they'll never get a chance to implement it. 
When you think about it, he's not too far off the mark with it. The NDP is backing us into a corner that they either are very dumb to do, or are betting on our own ignorance to overlook. That's not a good position to be in.

He also takes a shot at the Conservative and Liberal policy announcements, and I kind of tend to agree on both points. However, the NDP policy is probably the most scary of them all.


  1. I like the NDP proposal. Canadians spend $1.50 for every dollar they earn, and that isn't sustainable or healthy. Better solutions need to be found than giving banks and CC companies billions of dollars.

    By the way, both are being sued for price fixing, by merchants.

  2. I don't like the NDP proposal.

    If you can't afford to repay your credit card debt then don't use it. This is a problem that is entirely in the control of the individual consumer and the NDP solution is to make the government bail them out.

  3. Ted, some people racking up the debt are doing so because social assistance isn't cutting it. If they pay for rent, they don't have food money. Since grocery stores take credit cards, but landlords don't... you do the math. Sure, it's desperation, and it's not ethical, but it's happening.

  4. This is a pure socialist intervention into our economy. This proves the NDP is stuck in the dark ages. It was Bob Rae who said he left the NDP because unlike progressive movements in other countries, like Labour in Britian, the NDP has been unable to shift out of its archaic socialist dogma and into a being a modern progressive voice. This is why the NDP will NEVER realistically form government in Canada. Progressives need to unite behind Michael Ignatieff if we are to have any progressive voice in our legislation.

  5. "if offering cards were that profitable, banks would be falling over each other to give cards with better terms in order to attract more customers."

    They already do fall all over themselves. I get spammed by RBC, and I see spam from CitiBank in the junkmail coming to my apartment building. Handing out credit cards is akin to a license to print money, because CC companies get rich off of both the consumers and the merchants. The merchants are fighting back in a lawsuit. Who's fighting back for the consumer? Jack Layton (it pains me a little to say it).

    "Socialist intervention" AKA regulation of financial institutions, is what has delayed Canada's plummet into the American housing and credit crisis. Harper's taking credit for it, but it's the Liberals and NDP that should be crowing about their works' success, and pointing out that Harper's party and idols in the States wanted to do away with regulations.

  6. First of all, I have no problem with regulating the banks. This goes beyond regulation, however. This is pure socialist bunk. Second, neither the Conservatives NOR the NDP can take any credit for the sound financial regulations that prevented this country from having as bad an economic mess as others.

  7. I agree with Volkof and Ted. Solid arguments agaisnt this policy. I also take issue with Layton's intention's ...

    One of his stated goals is to reduce family's debt burden. If this statement is true, then isn't his policy counter to his goal?

    Shouldn't he drive UP the costs of credit in order to dissuade people from taking it on in the first place?