A recent study by the Bank of Canada reveals that regulating minimum payments on credit cards can reduce overall debt but also increases delinquency rates among consumers. Blacklock's Reporter says researchers based their findings on Québec, the only province with a minimum payment rule.The report, titled "Credit Card Minimum Payment Restrictions," highlights the dual impact of this policy. “Overall, we find the increase in minimum payment requirements led to a reduction in revolving debt and an increase in delinquency along with credit rationing,” the study noted. “How policymakers trade off these effects depends on how they measure consumer welfare.”Researchers explained that enforcing higher minimum payments is a strategy to reduce consumer debt. “Forcing cardholders to pay more of their balance each month is one way policymakers can attempt to reduce debt,” the report stated. High credit card debt is linked to consumer fragility and significant interest payments, which can negatively impact economic activity.In 2019, Québec’s Consumer Protection Act mandated higher minimum payments than those typically offered by credit card issuers. This law aimed to prevent consumers from accumulating high balances at interest rates of 20%. Prior to this regulation, there were no Canadian laws governing how credit card lenders should calculate minimum payments. Minimum payments were often as low as $10 plus interest and fees, regardless of the consumer’s statement balance.The new Québec law required minimum payments of 5% of the balance. Before this policy, 46% of Québec credit cards had minimum payments under 2% of the statement balance. The immediate result was a $23 increase in average monthly minimum payments and a 10% rise in delinquency. “The effect on delinquency is less clear cut,” the report added.The study pointed out the potential downsides of increasing minimum payments. “Increasing minimum payments may be costly,” it stated. “For example, it can force individuals who are liquidity constrained into delinquency. On the issuer side, it can make some lending unprofitable.”In response to these regulations, credit card issuers appeared to tighten credit. “We studied the policy’s effects on new cards,” the researchers wrote. “Here we find evidence the policy led to a reduction in credit access.”According to the Bank of Canada, 89% of Canadians over 18 hold a credit card, the highest rate in the world. Visa and MasterCard are the largest issuers, with Visa operating in Canada since 1968 and MasterCard issuing its first Canadian cards in 1973.The study underscores the complexity of regulating credit card payments, showing that while some consumers benefit from reduced interest charges, others may face increased financial difficulties.
