Credit card interest rates in Canada have long been outrageously high, and they represent one of the clearest examples of how banks exploit their informational advantage over customers. While most interest rates have tracked down with decades of lower inflation and policy rates, credit card rates have barely budged.
Today, typical credit card interest rates sit near 20%, a level similar to the early 1980s when inflation and interest rates were in double digits. From 1992 to 2022, Canada’s inflation averaged roughly 2%, and most market interest rates fell accordingly — except for credit cards. Even as inflation has moved above 2% in recent years and other interest rates have risen from pandemic lows, credit card rates remain stubbornly high. Looking back to 1980, any decrease in card rates is difficult to detect.
To put the gap in perspective: in 1981, the interest rate on a Visa or Mastercard was about 25%. Inflation that year was 12%, the Bank of Canada’s bank rate was slightly over 21%, and the prime rate offered to a bank’s best customers was 22.75%. The extra charge for using a credit card above prime was only 2.25%, which made sense as compensation for looser income and collateral requirements compared with prime loans.
In the summer of 2024, by contrast, standard credit card purchase rates are around 20% and cash-advance rates near 23%. With prime at 6.95%, the spread over prime is about 13.05%. During the pandemic when the overnight rate was 0.25% and prime fell to 2.45%, the premium on cards swelled to roughly 17.45% above prime. That compares with a mere 2.25% premium in 1981. Over forty years, the nominal credit card rate has dropped only about 5 percentage points, while prime fell by more than 15 points from its highs to pandemic lows.
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Imagine earning a consistent return of 17.45% on your savings: the impact on wealth accumulation would be enormous. Yet during the pandemic many savings accounts paid only a few tenths of a percent. In effect, depositors who receive low returns are helping fund credit card balances that carry rates roughly forty times larger.
To illustrate the difference with a simple investment example: a $1,000 deposit in a thirty-year Government of Canada bond at 3.3% would grow to about $2,250 by 2053. The same $1,000 invested at 17.45% for thirty years would balloon to roughly $124,621 — a stark contrast that highlights how lucrative a compounded credit card return would be if it were available to savers instead of being charged to borrowers.
High card rates are not just a matter of record-setting yields. Many consumers have little choice but to carry card balances, since credit cards require fewer income verifications and no collateral, offering immediate borrowing convenience. Banks, it turns out, prefer customers to borrow on cards rather than take out lower-rate prime-based loans, because cards are far more profitable.
Data from the Office of the Superintendent of Financial Institutions show that, quarter after quarter, banks earn nearly as much from credit card portfolios as they do from their much larger mortgage books. Part of the reason is that loans tied to prime rates typically demand collateral, paperwork and credit vetting that make them harder to access than revolving credit card lines.
The penalty for missing payments can be especially punitive. After a single missed payment, one customer received the following notice from a major bank:
THE LAST MINIMUM PAYMENT WAS NOT RECEIVED ON TIME. IF YOU MISS ANOTHER MINIMUM PAYMENT IN THE NEXT 11 CONSECUTIVE STATEMENT PERIODS YOU WILL LOSE ANY PROMOTIONAL RATE(S) AND THE ANNUAL INTEREST RATES ON THIS ACCOUNT WILL INCREASE TO 24.99% ON PURCHASES AND 27.99% ON CASH ADVANCES.
Such escalation clauses can transform a manageable balance into a much more expensive obligation. Even if missed payments signal an elevated risk of default, raising rates by five percentage points (or more) after just one or two delinquencies is harsh, and can feel like punitive leverage rather than reasonable risk management. Remember, banks already build a large spread over prime into card pricing to cover losses.
Some will point out that credit card rates are also high in other countries, such as the United States and the United Kingdom. While that is true, those markets are also highly concentrated. Citing one concentrated market to justify another is a weak defence: it does not address whether consumers are being charged fair and transparent prices.
So what should change? Two main things: more competition and greater transparency. Research shows financial fees tend to be lower where disclosure standards are strong and consumers can easily compare pricing. In Canada, many bank fees and rate details remain opaque. Consumers often lack clear, comparable information about card pricing, promotional terms and penalty triggers — making it hard to pressure banks, regulators or elected officials to act.
Excerpted from FLEECED: Canadians Versus Their Banks by Andrew Spence. Copyright 2024. Reprinted by permission of Sutherland House Books.
Andrew Spence is an independent financial consultant and economist with extensive experience in Canadian and international banking. He has served as an investment executive at two of Canada’s largest pension plans and as Special Adviser to the Governor of the Bank of Canada.