Thursday, January 10, 2008

Credit Cards in Canada

Credit card use in Canada is a prolific and a very profitable business for financial institutions. At the end of 2006 there were over 60 Million Visas and MasterCards in the pockets of 30 million Canadians. There were over 26 Million active Visa and MasterCard accounts. So, irrespective of American Express, Diner's Club, and department store cards, every man, woman, and child in Canada has 2 cards each.

What do we do with all of this available credit? We spend, a lot. Visa and MasterCard transacted over $214 Billion dollars worth of business in Canada in 2006 and were able to charge over $29 Billion dollars of interest and fees on the 26 Million active accounts.

Over the past 10 years, the number of active credit card accounts has doubled, credit card transaction volume has tripled and the profit from these transactions has quadrupled for the card issuers. Credit cards have been a high growth business to be sure.

Canadian are diligent about paying their credit card bills too. The delinquency rate on credit card balances is low at less than 1% and has remained quite low for at least 15 years. A seemingly low risk business with very large profit margins. I wonder what the future has in store.

How do you feel about the large profits being generated by the credit card companies? How do you use your credit cards? Merchant fees can sometimes be high and I often wonder how much that affects the price of the goods we buy.

My wife and I use our Visa card for nearly every purchase we make because we get cash back and don't have to carry cash or pay any banking fees for using a debit card. We also pay off our balance every month and haven't paid a cent in interest or fees since having these cards. I know that isn't necessarily typical among the general population but is likely fairly representative of the readership of this blog!


aetakeo said...

Unfortunately, it is not true of our family that we pay off every month. We're carrying credit debt, although we're paying it down and we've rolled most of it from credit cards to a line of credit with a lower interest rate. The problem with credit - and also the benefit of it - is that it allowed us to function and get ourselves re-started during a time of unexpected financial stress. Both my husband and I came from homes without any extra resources and went to school without help or residence, and so we had very little cushion.

I wonder if the way society works these days - fewer people at home to help with emergency childcare, fewer relatives around to help by bringing casseroles or sewing clothes or helping with general labour, smaller spaces meaning people are reliant on others to produce things that once could be produced at home like clothes, furniture, etc - is being somewhat subsidized by credit. Our real wages aren't going up, but we are becoming more specialized, less "competent" producers of goods for ourselves and our loved ones. Now we buy from specialists, which makes it cheaper overall in terms of total work per unit of, say, dining room table - but it's more *money* floating around between people.

Of course, I live in downtown Vancouver where the apartments are small enough to make knitting supplies clutter. I'm sure, based on the ads for Home Depot, there are still tons of garage workshops out there.

Just not people I know and can bribe to build me bookshelves. *G*

aetakeo said...

Or, in other words, (because I hadn't gotten this quite clear yet), I wonder if credit is becoming the new private charity or public welfare for people like us, who just need help for a short time. If we hadn't had credit, we would have swallowed our pride and gone to the food bank. But we're proud, and so went shopping with Mastercard.

RentingSucks said...

I think for most people it goes like this:

1) See big screen TV.
2) Want big screen TV.
3) If room on credit card buy big screen TV.
4) If no room on credit card get another credit card.

Good that you didn't slide down the slippery slope of credit card debt. You used them with an end in mind. Basically you pay more for stuff than if you waited and unlike housing you don't ever get your arse pulled out of the fire by appreciation of an asset.

Looking at the chart though it looks like during the two largest housing downturns the deliquency rates for credit cards shot up. This is either people relying on their housing assets to keep them liquid (and that failing) or using their credit assets to try and ride out the downturn.

For me I just use credit cards as a convenience and of course pay it off every month. I have noticed that the terms are getting more US like though. I don't use my American express card much any more because I accidentally paid $1 less than I owed and I was charged interest on the full amount all the way back to my last statememt ($10 for $140 dollars). So I voted with my business but it looks like many other cards are introducing terms like this.

mk-kids said...

We charge everything (including my business expenses) to the credit card & pay it off every month. We do get dinged a big user fee annually even though we put a lot of money through on our card. It pisses me off but we don't want to change cards until we use our points which are accumulating madly. Next card will be a cash back one.

How can I find a cash back card with no annual fee?

jesse said...

I use a credit card for most purchases and pay it off every month, getting true 1% cash back. If you have the discipline and don't change your spending habits, the 1% goes straight to the bottom line.

"How can I find a cash back card with no annual fee?"

CIBC has Visa dividend card but the dividend is graduated (read the fine print).

Citi has Mastercard (Enrich I think) that is true 1% cash back with no fee. I think Laurentian has one as well.

With these cards you need to treat with extra care because they will typically have complex interest calculation charges that can ding you if you don't pay them off in time.

M- said...

I've got an MBNA Canada Mastercard. No annual fee, 1% cash back applied as a credit on my January statement, and it also gives free rental car and travel insurance, extended warranties, etc, etc...

I originally had a no-fee, no-features MBNA card. My wife also had one, on a separate account. Then an MBNA third-party marketing company called to try to sell me another no-fee no-features card. I told them I didn't want it. Then to get the guy off the phone, I told him to send me an application and I would consider it. A couple weeks later, an unwanted card arrived in the mail. I was angry, so I called MBNA. My wife cancelled her card, then passed the phone to me, and I told the account manager on the other end of the line that I was cancelling my two cards. He sounded stressed, and put me on hold for a few minutes, then made me an offer. He apologized profusely for the marketing agent, claimed he's follow it up because he's had several people complain about this, and gave me the choice of a no-fee full-features low-interest card, or a no-fee full-features cash-back card.

So I took the cash-back card. MBNA's customer service since then has been good, and I've been overall pleased with them. I've had this card for over 2 years now.

...And yes, I pay it off every month! No way am I going to carry a balance given the ridiculous rate of interest!

...I'm also much more direct with telemarketers now.

mohican said...

I get a no-fee, cash-back visa card with my banking package which is free because I maintain a balance over the threshold. The card also includes travel insurance, roadside assistance, and extended warranties for some purchases. It isn't a bad deal at all.

mightymouse said...

Hmm... I have the CIBC dividend card...I didn't read the fine print though. I've had this VISA for the past decade and only just figured out that they pay me to spend (dividend is a big word). I now use my personal card as my business VISA as I earn the 1% and there's no fees. I treat my VISA account like it's a chequing account and deposit chunks of money every now and again. When I notice my positive balance getting a little low I toss a little more cash at the account.

fish10 said...

Amex just put a $400 Million provision against deliquent accounts in the US.

They are down a bunch after hours.

This is AMEX we are talking the cream of card users.

So in the US things are looking very rough (but of course we are different!)

patriotz said...

The credit card companies charge merchants a fee for purchases made with their cards and of course this is added to retail prices.

You can't get around this by paying cash, except at a few computer shops as far as I know.

So I play the game in my favour, I use a CIBC Dividend card. Get an interest free loan on my purchases and a rebate every year. At least I'm getting a piece of the action :-)

jesse said...

"I get a no-fee, cash-back visa card with my banking package which is free because I maintain a balance over the threshold."

A lot of banks have this but the threshold is a few $K (e.g. one bank is $5K). You need to watch your balance closely as I don't know what happens if you drop below the threshold. (Would they charge you the $100 annual fee right away, etc. etc.)

Depending upon how much you spend on the card it may be better to keep a lower chequing account balance and have the rest in an interest bearing account instead of getting a dividend with minimum chequing account balance (the bank gets their money one way or another!). I doubt it's worth the hassle of keeping a low balance and watching you don't go into overdraft however. Travel/auto insurance and roadside are good features but I have never tried to file a claim and get money from the policies. Read the fine print.

CIBC puts you on telemarketing lists and tries to sell you stuff like theft insurance, plus their dividend is graduated so is usually 0.5% for a normal spending pattern. I have one but only use it when places don't accept MC. I see people use them all over the place but I can't figure out why people don't use MBNA/Citi Mastercards instead.

freako said...

The credit card companies charge merchants a fee for purchases made with their cards and of course this is added to retail prices.

Yes, for the most part money you get back is really your own as merchants simply price these fees in. Havings aid that, it is clear that cash buyers subsidize credit card users, and that irresponsible credit card users subsidize responsible ones. If you do as Mohican suggests, you get a free ride. Most people don't of course. If they did, the credit card companies would find other ways to make money.

5er said...

My grandfather said to me once "If you can't buy two... don't buy one!" I try to live by those words. Coast Capital Savings has a nice no fee chequing account so I use debit except for my occasional online purchases, where I Paypal and avoid using a credit card. I should check my Fico score, with no loans, and so few credit card purchases it must be turning to sh*t. :p Oh well who cares. I'm just going to pay for my next house with cash.

jesse said...

"If you do as Mohican suggests, you get a free ride."

In my case, I use my cash back to buy lunch.

rjan2 said...

I was literally forced to start taking credit and debit cards in my health care practice about two years ago. Patients kept pestering and pestering me; cash or cheques just weren't suitable options. So, nowadays, I pay several hundred bucks in merchant fees every month, patients complain that I've raised MY fees, and fewer people come in as a result. So, damn the credit card companies as far as I'm concerned, and damn the sheep for exchanging financial prudence and saving for unbridled "have it all have it now" deficit spending life styles. It'll all collapse eventually, but the fall will drag me down too.

Patiently Waiting said...

I received an offer for 0.97% interest credit card cheques. The thought occurred to max the card and put the money in a savings account 5%, but life is never that easy. I'm sure there's a catch.

Patiently Waiting said...

One catch I know is the low interest offer ends in July, but I could still make money off the banks in the meantime, couldn't I?

Yeah, I know, read the fine print. ;^)

mk-kids said...

Hey thanks all for your no-fee credit card suggestions. I use mine for work and need some of those benefits - definitely rental car/ travel insurance.

Looks like MBNA might be best for me when I'm ready to cash in my points & say bye-bye to RBC.

freako said...

I pay several hundred bucks in merchant fees every month, patients complain that I've raised MY fees, and fewer people come in as a result.

1. Are your margins really so thin that you have "pass" small costs on?

2. Is your business really so price sensitive that a one or two percent price increase causes fewer people come in?

3. Your costs aside, you should price to maximize profits. Clearly you should have eaten this cost if fewer people come in.

4. You'd think that the most price sensitive customers havea cash back credit card, so most of the passed on expense would be removed.