The Ontario Court of Appeal ruling in Clear Flow restored order to the credit markets. In the spirit of magnanimity, it is appropriate to give the losing theory a word on the subject of the clarity required in annualized interest rates.
I thought it would be interesting to look at the Supreme Court of Canada dissents on the Interest Act s.4. In particular the dissent of Davies J. in Canadian Mortgage Investment Co. v. Cameron (1917) 55 S.C.R. 409
He said that the point of the legislation is to make it perfectly clear for the borrower to understand by looking at, what is in effect an amortization schedule, precisely how much interest and principal the borrow will be paying on an annual basis.
Anyone who has gotten a mortgage (the actual legal transaction is you giving a mortgage) but you remember the schedule of payments that the bank gives you. This is what Davies J. meant in 1917.
Accordingly, Visa is supposed to clearly tell me my annualized interest rate.
So what does my Visa card say about it?
The legal documents that associate with my credit card are: the RBC Royal bank Business Credit Card Agreement. The word ‘interest’ is found 104 times in this document. Here is paragraph 17, and 19 the closest thing to an annual interest rate statement. After reading this most people would think the ANNUALIZED interest rate is 19.99%
- Interest Rates and Charges:
The current Interest Rates are set out on each Account Statement. They are expressed as annual percentage rates. The standard Interest Rates are shown in the chart outlined in the “Standard Annual Fees, Grace Period and Interest Rates” Section of this Agreement. If you are taking advantage of any special offers, the Interest Rates may be different than those on the chart. The Interest Rates may change from time to time.
Applicable to all Accounts
Fees are treated in the same manner as Purchases for the purpose of charging interest. The transaction date for a Fee is the date that the Fee is posted to the Account.
We do not charge interest on interest.
We calculate interest daily; however we only add it to the Account monthly. The amount of interest we charge is calculated as follows:
- Standard Annual Fees, Grace Period and Interest Rates:
The following provides some guidance with respect to standard non-refundable annual fees, Grace Periods and standard Interest Rates for our Cards. Your annual fee may be different from that shown in this Agreement if the terms and conditions for other banking and related services you have with us provide otherwise. Annual fees are charged on the first day of the month following the Account opening (whether or not the Card is activated) and annually thereafter on the first day of that same month.
| Credit Card | Non-Refundable Annual Fees | Grace Period (days) | Interest Rate | ||||
| First Card | Each Additional Card | Purchase Interest Rate | |||||
| Visa CreditLine for Small Business | $0 | $0 | 0 | Prime+2.9%-11.9% | |||
| Business Cash Back Mastercard | $0 | $0 | 21 | 19.99% | |||
| Visa Business | $12.00 | $12.00 | 21 | 19.99% | |||
| Visa Business Gold* | $40.00 | $40.00 | 21 | 19.99% | |||
| Avion Visa Business** | $120.00 | $50.00 | 17 | 19.99% | |||
| Avion Visa Infinite Business | $175.00 | $75.00 | 21 | 19.99% | |||
The word ‘compounding’ does not occur in this document. So lets do a calculation:
If I have a $1000 balance on the card what do I owe 1 year from today?
the daily rate is 19.99% divided by 365 days = 0.000547
$1000 x 0.000547 = $0.54 per day
they do this every-day for each month:
$0.54 x 30 = $16.43 interest accumulated in month 1.
So after the first month I owe $1,016.43
now they apply the 0.000547 to the second 30 days:
$1016.43 x 0.000547 = $0.55 per day
$0.55 x 30 = $16.67 interest accumulated in month 2.
Now I owe $1033.10 on day 60
1033.10 x 0.000547 = $0.56
$0.56 x 30 = $16.95
now I owe: 1033.10+ $16.95 = 1050.05 on day 90
1050.05 x 0.000547 = $.57
$0.57 x 30 = $17.23
now I owe 1067.28 at the end of day 120
$0.58 x 30 = $17.51 + 1067.28 = $1084.79 owing at the end of day 150
17.80+$1084.79 = $1102.59 owing at the end of day 180
$1120.68 owing at the end of day 210
$1139.07 owing at the end of day 240
$1157.76 owing at the end of day 270
$1176.75 owing at the end of day 300
$1196.06 owing at the end of day 330
$1215.68 owing at the end of day 360
The actual ANNUALIZED interest rate on this RBC credit card is 21.57 percent.
Do you think what RBC tells me is a clear statement of my ACTUAL annual interest rate?
Do you think that when they use the word ‘calculate monthly’ ordinary people understand ‘compound monthly’?
Does Davies J. in dissent in 1917, have a point? (hint: yes)
Few pieces of federal legislation truly impact individuals. Most legislation is properly architectonic: meant to maintain the big things: air traffic, crime, defence etc. affecting individuals indirectly. The Interest Act is one of those unique pieces of legislation that matters. If it is interpreted too aggressively, the credit market will be damaged: (no mortgage for you). If it is interpreted too liberally, you become an ATM for the banks.
