Since the first Diner's Club credit card appeared in Manhattan in 1950, the number of cards and the amount of purchases they have financed has literally exploded worldwide.
In 1977, 8.2 million credit cards were in circulation in Canada. By 2003, there were 50.4 million, and by October 2008, 68.2 million. From 1977 to 2008, the annual volume of Visa and MasterCard credit card transactions rose from 118.8 million to over 2.4 billion.
Given the size of the credit card market, particularly in North America, we felt it was vital to understand the sales and marketing practices that encourage consumers to purchase one or more cards, as well as the pitfalls that may lie behind these tempting practices. A growing number of authors claim that credit cards, unlike cash or other payment methods, encourage not only consumption, but also indebtedness.
We therefore decided to focus on practices that seemed likely to encourage Canadian consumers to spend and borrow. We wanted to know the impact of these practices on consumers' financial and budgetary situation. We chose five common practices that we felt met these criteria, and whose budgetary impact could be measured relatively reliably.
Among all the practices of credit card companies likely to attract consumer customers, we identified five whose financial and budgetary impact could be relatively well measured.
For each of the practices identified, we have provided a brief history and description of how it works. We have then attempted to identify the main advantages and disadvantages for consumers.
To ensure that the documents we choose to cite as examples are indeed representative, we have selected them according to the following criteria:
We based ourselves on the financial institutions with the largest credit card market shares in Canada. We also took into consideration those institutions that, to our knowledge, advertise the most. Finally, we also considered some atypical or original practices.
We then called on Éric Brassard, chartered accountant and financial planner, to determine the potential impact of the practices studied on consumer finances. Mr. Brassard is the principal author of the books "Un chez-moi à mon coût", on the subject of housing, and "Finance au volant", on the subject of automobiles. He was also awarded the CA Emeritus prize by the Comité des CA de Québec in 2007.
For each of these practices, we also looked at the "consumer psychology" aspect, where appropriate, to determine how the practice in question could influence consumer choices and behavior.
We then studied the legality of these five practices in Canada, notably in Quebec, Ontario and British Columbia.
Finally, we interviewed two Canadian and three U.S. stakeholders with expertise in credit card regulation. We sought their views on each of the five practices discussed in this report. We also asked them what they thought were the solutions to the problems raised in this study.
After studying each of the five practices identified, we have come to the conclusion that each of them can have a negative impact on the cardholder's budgetary health. These practices are symptomatic of an industry that, in its quest for profits, has come to completely disconnect itself from its customers' needs.
Indeed, the consumers likely to take the bait are often those with the greatest financial difficulties. Insofar as the credit card products studied are mainly aimed at a clientele that already has payment difficulties, or that pays interest monthly on its credit card(s), it seems obvious to us that the strict rules that accompany these offers (restrictions of all kinds, multiplication of fees, shortening or even elimination of grace periods, interest rate hikes, etc.) put consumers at a disadvantage.
In the course of this research, we also found that advertising materials, solicitations and credit card contracts are, more often than not, presented in such a way as to exploit consumers' weaknesses and vulnerabilities. In our opinion, credit card issuers abuse their dominant position to the detriment of consumers.
Finally, we were able to get a better idea of the scope of the credit card system. The five practices we studied are part of a gigantic complex of contractual clauses that change, fees that multiply, interest rates that vary, and so on.
Trying to restore the balance of power between consumers and these companies, by targeting just five commercial practices, can be compared to giving a kiss to a dying man's "boo-boo". It's an act of goodwill that will turn out to be a mere flash in the pan. The credit card industry is extremely powerful, and lobbies very effectively in both Canada and the United States.
We don't believe that simple legislative intervention regarding certain business practices will be enough to force the credit card industry into the ranks of responsible merchants. The courts will probably have to get involved. And that could take a very long time. Option consommateurs therefore believes that Canada's provinces must, in the short term, carry out a thorough review of all credit-related regulations.
In view of all the practices we have observed in the course of this research, we fear that American history may be repeating itself: lobbying to modify or even invalidate consumer protection rules and tighten bankruptcy rules, growth of the debt collection market, multiplication of fees, attempts to evade existing regulations by advertising in unregulated forms or by concealing information in texts written in tiny type, and so on.
This business model has had disastrous consequences. Moreover, given the virtual absence of laws and regulations, it is very difficult for American consumers to obtain redress when they suffer injustice. Indeed, you can't say that a law has been broken when there is no law.
Finally, in the current context of financial crisis, we do not believe that the situation of Canadians can be improved by simply sprinkling a few of the report's recommendations. The recommendations we present form a whole and, in our view, must all be adopted if they are to be effective.
