Tight credit markets put squeeze on consumers and retailers
Published Friday November 14th, 2008
Tight credit markets are putting even more stress on Canadians' love-hate relationship with credit cards and retailers say they too are getting pinched by the higher use of plastic.
Consumers are seeing stricter terms for carrying credit card balances, and even tougher terms if they fail to pay them off, while shop owners are paying increased transaction fees to credit card companies.
The squeeze on both sides of the credit card transaction comes at the kickoff of the pre-Christmas retail period, the biggest spending season of the year, and as Ottawa encourages banks to keep lending by recently buying an additional $50 billion in bank-held mortgages to free up more bank capital for loans.
Laurie Campbell, executive director of debt-counselling organization Credit Canada, said that while Canadians are responsible for their overspending, tighter credit conditions only worsen the economic environment.
"It concerns me because I don't think it will help people in financial difficulty who are already struggling, and I'm not sure it will help the creditors either," said Campbell.
"We know the creditors are under unusual pressure ... but I think these people not paying their credit card balances aren't doing it simply because they can't, not because they don't want to or are trying to be difficult."
With a slumping economy and tighter credit around the world, companies and consumers are facing a squeeze on incomes and face harder times borrowing money for everything from buying new equipment, expanding a plant to financing a car loan.
With tighter money, consumers are also facing bigger hurdles when they have problems repaying their current debts.
Toronto-Dominion Bank (TSX:TD) is the latest bank to hike interest rates for people unable to pay their minimum credit card balance. The bank says that as of Dec. 1 people who miss two consecutive payments will be charged a rate of 24.75 per cent, an increase of five percentage points.
Royal Bank (TSX:RY) has had a similar policy in place for years, and also hikes the rate five percentage points if a customer misses a minimum payment three times or more in any 12-month period.
Bank of Nova Scotia (TSX:BNS) also shortened the interest-free grace period for new purchases earlier this year to 21 days from 26. It is also changing the conditions around which the 21-day interest-free period applies to new purchases. As of Dec. 1, an account needs to be paid in full in the previous and current cycle to be eligible to avoid interest charges on new purchases. Until then, an account was always eligible for the interest-free period provided the corresponding statement is paid in full by the due date.
Department stores are also clamping down, including Canadian Tire Corp. (TSX:CTU) which is reducing credit limits on a number of inactive accounts, which it says will "mitigate future credit risk exposure which may arise due to current economic conditions."
The moves come as consumer debt levels reach epidemic levels.
A recent survey showed household credit grew 12.2 per cent in the first six months of 2008, increasing at a pace not seen since 1990. Household credit per Canadian is now $37,467, and household debt as a percentage of personal disposable income is now over 131 per cent, the highest level on record.
The week of Nov. 17 is Credit Education Week in Canada, and Campbell said it's a good time for Canadians to reassess their debt, and take necessary actions to reduce it.
"Look at your income and your expenses and find out what you can cut back," Campbell said.
Her advice is to consolidate debt where possible, and pay off the highest-interest debt first. For example, a bank credit line tied to the prime rate could be used to wipe out department store debt at 20 per cent plus interest rates.
Campbell said the exercise can be overwhelming for some, and recommends reaching out to a credit counselling service if needed.
Declaring bankruptcy should be the last resort, Campbell said.
"Bankruptcy is financial death. It's not something people should take lightly."
Diane Brisebois, president and CEO of the Retail Council of Canada, said retailers are also being hit by tighter credit conditions, including being hit with higher transactions fees for accepting credit card payments.
Brisebois said those so-called interchange fees paid in Canada are already some of the highest in the world.
"If you go to a local merchant and make a purchase, the chances are the product you are buying hasn't gone up, but the percentage the merchant is paying to sell it to you has," said Brisebois.
"It's one of the biggest tax grabs I've ever seen, and just before Christmas."
Brisebois said the higher fees come at a time when retailers are also seeing a drop in consumer activity as a result of the slowing economy.
"It is disturbing to see both financial institutions and credit cards companies responding to the market by increasing fees to consumers and merchants," said Brisebois.
"It has an impact on how people spend, regardless if they have money or not. It puts a chill on the market, and it's unfortunate."
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