May 21, 2009 / 2:29 PM / in 8 years

Canada announces new credit card rules

<p>Canadian Finance Minister Jim Flaherty announces new credit card rules at a news conference in Toronto, May 21, 2009. REUTERS/Peter Jones</p>

TORONTO (Reuters) - Credit card issuers in Canada will have to provide a standard 21-day grace period on payments for new purchases under regulations being introduced by Ottawa, but the rules fall short of tough new U.S. regulations.

The new Canadian regulations -- part of an eight-point action plan -- are also designed to improve the financial literacy of the public, Finance Minister Jim Flaherty said on Thursday.

The 21-day grace period regulation was met with some resistance by financial institutions, Flaherty said.

Some card issuers were charging interest on new purchases during their grace periods when the cardholder did not pay in full their balance for the preceding month, he said.

The new rule proposes to provide an interest-free period to all new purchases when cardholders pay in full in the current month, regardless of outstanding balances the month before.

”It is a major change. It will cost financial institutions

tens of millions of dollars,” Flaherty said.

Other rules include a requirement for improved disclosure on credit card contracts, advance notice of changes in interest rates, and the prohibition of certain debt collection practices.

In contrast, the U.S. initiative prohibits arbitrary rate increases, bans credit card issuers from raising rates in the first year, and takes numerous other steps designed to prevent abuse. It is expected to be signed into law by President Barack Obama within days.

“Basically the changes in the U.S. are a lot tougher, because the banks in the U.S. are suffering much greater problems and are looking for a way to raise their profits to survive,” said Laurence Booth, CIT chair in Structured Finance at the Rotman School of Management.

“Banks in Canada are much more sound, nothing close to what has been happening in the U.S.”

The World Economic Forum last year ranked Canada’s banking system as the world’s soundest, and conservative lending practices have helped it avoid the losses that have driven many U.S. and European banks into insolvency.

Flaherty said Ottawa will not move to limit interest rates on credit cards.

“I believe in consumer choice,” he said. “If someone wants a lower interest rate on a card then they have some choices and they can do that. If they want more frills they’ll probably end up with a higher interest rate, but that information is available for consumers to choose.”

The proposed new regulations would apply to credit cards issued by federally regulated institutions such as banks.

Editing by Peter Galloway

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