Why slipping on your credit card payments is about to cost you bigger bucks

An interest rate of 21% sounds high but it will seem like a bargain to some Toronto-Dominion Bank credit card customers when it climbs to 24.99% at the end of next month.

Credit card debt has always been among the most expensive ways to borrow, largely because it is unsecured and traditionally comes with a much higher default ratio.

In the world of credit cards, being considered in arrears amounts to not meeting the minimum payment, which in most cases is 3% of the outstanding balance every month. Three months of not making payments puts you in arrears, according to credit agencies.

That type of non-payment will also put a bulls-eye on your head as TD will now charge the higher interest rate when the minimum payment is 30 days past due on its TD First Class Travel Visa Infinite card.

Customers are notified in their next statement that they have missed that minimum payment and must pay up or higher rates will be in effect on the next payment cycle – in other words, two missed payments in a row and the rate goes up. It climbs to 27.99% from 21% for missed payments on cash advances.

“We understand that price changes can be a sensitive issue and we encourage any of our customers with concerns or questions to talk to us,” said Alicia Johnston, a spokesperson for TD, in an emailed statement. “As all of the banks do, we review and occasionally make adjustments to pricing to reflect current market conditions, the cost of providing services and our competitive position.”

CIBC is following suit, increasing its Aerogold Visa interest rate to 24.99% on purchases; and to 27.99% on cash advances, if the cardholder does not pay the minimum balance in two consecutive payment cycles.

Regina Malina, senior director of decision insights for Equifax Canada, said her group's present data just looks at arrears, meaning people who have made no payments over a three-month period. Overall, average credit card balances for Canadians have gone down over the last couple of quarters.

“We like to wait a couple of quarters before we start saying something is a pattern but it seems like after this time period from mid-2013 until early 2014, where there was more activity in balances, it seems to have slowed down. But we are watching it closely,” says Ms. Malina.

As for the percentage of delinquent credit cards, it was 3.5% at the end of the third quarter – much higher than other types of loans like mortgages, which were well under 1%. Credit card delinquencies peaked at almost 5% in 2008.

According to BMO's 2015 Credit Card Report released Feb. 10, 30% of Canadian card holders do not pay their credit card bill off in full every month.

Laurie Campbell, executive director of Credit Canada, said the reality for most credit cards is if you can't pay you are penalized even more. “You miss payments, and it's different for each creditor,” said Ms. Campbell, adding usually you pay about five percentage points more when you miss a payment. “I think this is an American-style thing and started about three or four years ago.”

To illustrate the change, TD notes that, on an outstanding balance of $2,500, making the minimum payment results in a monthly charge of $44.59. That jumps to $53.06 at the 24.99% rate, when you miss your payments, starting March 31.

The real solution is to pay off your entire debt every month because, as Ms. Campbell notes, the average credit card interest rate is about 19.9%. “You think about 20% on a $5,000 balance over a year,” which comes to close to $1,200 in interest annually, she says.

“You keep paying that minimum and you are never going to get anywhere.”

Is there any evidence that jacking up interest rates would be a stronger incentive to keep the cash-strapped out of arrears. Ms. Malina says that's unclear. “It's not a bad thing to force people to pay that minimum obligation,”  she says. “You need a couple of quarters to see [if increasing the interest costs] is having any sort of impact.”