Thursday, March 31, 2011

Jack Layton's Plan to Help Money Mart

The NDP have the spectacular good fortune of never having to worry about actually implementing any of the policies they announce. Good thing too. Jack Layton's latest policy brain fart is a cap on credit card interest rates at something like 5 percentage points over prime. Sounds like a pretty good plan? Tired of getting hosed by greedy credit card companies/banks? Well, let's think what would actually happen if Layton's plan was to be put in place. As it is, Canadians put way too much on credit racking up monstrous credit card bills they are unable to pay off. One of the few disincentives for doing this is the absurd, and yes frankly near usurious, rate of interest applicable on outstanding credit card bills. If you remove that disincentive, chances are good that people will rack up more debt, maybe not in interest payments, but in larger purchases.

Banks will see this prospect and bluntly they won't like it. One of the reasons credit card interest rates are so high is that the risk of default is high. The high rate of return makes the cost/benefit analysis make sense for the owner of the debt be that a bank or a third party who purchased the debt. Eliminate the high rate of return and banks may prove a lot less likely to issue credit cards to people with marginal credit ratings... like people who don't pay off their credit cards every month. By forcing down interest rates, Layton may make credit cards a tool of the rich. Good you say? Credit cards are evil? Problem is as unfortunate as it may be, many Canadians rely on credit cards to make payments on essential items in between pay cheques. If the banks stopped giving these people credit cards, they would not stop having those cash shortages. Instead, working class Canadians who want access to easy credit would be forced to even more predatory places like payday loan offices. The only people who will actually benefit from this as far as I can tell are the good folks at Money Mart.

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