With Canada’s annual inflation reaching its highest point in more than 30 years, interest rates could rise faster and higher, making mortgages and bank loans more costly.
But consumers are unlikely to feel their wallets squeezed further when it comes to the interest rates on their credit cards, which are not expected to be impacted by rate hikes.
“There is no direct correlation,” according to Natasha Macmillan, the Director of Everyday Banking and credit card specialist at Ratehub.ca, an online website that allows Canadians to find and compare different financial products, including credit cards.
Macmillan says credit card interest rates have generally not followed rate hikes or decreases issued by the central bank.
“They typically haven’t seen much fluctuation, especially in the last little while. So that’s why we aren’t expecting any significant kind of changes and definitely no correlation with the target interest rate that we are seeing.”
Earlier this month, the Bank of Canada raised its key interest rate by half a percentage point to one percent, the biggest single hike in more than 30 years, and warned that more rate hikes were coming. The benchmark rate has remained below three per cent since the 2008 financial crisis.
Credit card issuers typically make money in a variety of ways such as charging transaction fees to businesses and interest to cardholders.
The vast majority of Canadians over the age of 18 – 93 per cent – have a credit card, with 41 per cent of them saying they carry a balance from month to month, according to a 2019 research report published by the Government of Canada.
With interest rates on reward-based credit cards typically set at around 19.99 per cent in Canada, a sizable portion of Canadians are paying a hefty amount of interest, the government notes. The interest rate on cash advances for credit cards are even higher, ranging from 21.99 per cent to 24.99 per cent, according to Ratehub.ca. There are also low interest rate credit cards that only charge about ten to 12 per cent, Macmillan says.
The government notes that credit card interest rates can increase by five per cent or higher if the required minimum monthly payments are not paid by the deadline, an increase that could be either temporary or permanent.
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