If elected prime minister, New Democratic Party leader Jack Layton says that he’ll ban high interest rates on Canadian credit cards. The legal cap will be prime plus 5 per cent, which currently equals 8 per cent.

Significant savings
Consider a $4,000 credit card balance. Pay $120 monthly, and your total interest is:
• $538.78 over three years and two months under the 8 per cent cap.
• $2,545.33 over four years and seven months if the card charges 23.5 per cent.

Under the rate cap, you save $2,006 in interest charges and retire your debt one year and five months earlier.

Let’s put those savings into perspective. A March 2011 Canadian Bankers Association report reveals that:
• 65 per cent of Canadians pay off their credit card bills monthly.
• Credit cards generate only 5 per cent of overall household debt.

The rate cap does help Canadians drowning in credit card debt. In October of 2010, another CBA report shows that the delinquency rate for MasterCard and Visa cards jumped 34.9 per cent to 1.16 per cent in three years.

Hidden costs
One problem with enticing rates is that they encourage more debt.

Another concern is that profit-driven card companies will impose much higher fees to compensate for lost interest revenue. Annual fees hurt all cardholders, including the 65 per cent who fully pay their monthly statement amounts.

Legally, card issuers can cancel credit privileges. Doing so will force some consumers to take out payday loans that charge even higher rates and fees.

Small business risks
Credit card companies may also impose higher merchant transaction fees on small businesses. In Canada, small businesses represent 98 per cent of all enterprises and employ 48 per cent of the Canadian workforce.

To be successful, the cap must not cause job losses. For most Canadians, paying bills depends on having sustainable employment income – even with a credit card interest rate cap.