Balance transfers less common in Canada than in U.S.

Balance transfer offers with 0 per cent interest are extremely rare in Canada, whereas they thrive in the U.S. Why is there such a disparity?

Currently, there are only four credit cards in all of Canada offering 0 per cent interest as an introductory rate on balance transfers. They are:

In the U.S., meanwhile, there are at least 40 0 per cent interest balance transfer offers - some for as long as 21 months - on alone. balance-transfers-canada

There are a few reasons for such inequality, including America's much larger population - which breeds increased competition among a greater number of banks than Canada's Big Five - the U.S.'s card culture and the higher revolving credit rate there.

American banks face greater competition
Because America doesn't have a national banking system, as Canada does, the U.S. system is much more fragmented and regional or local than Canada's. As a result, the U.S. has more credit card issuers than Canada, so more U.S. banks offer balance transfer credit cards at 0 per cent interest as a way to attract business.

"Canadian banks tend to run balance transfer programs when they are seeing lower overall interactions or demand for their credit card offerings," says Robert Paterson, president and CEO of Alterna Savings, a credit card issuing credit union with 24 branches across Ontario and Quebec.

When this happens, Canadian banks offer balance transfers hoping that the 0 per cent introductory offer will bring in consumers seeking a lower interest rate on their card debt. Meanwhile, the banks hope that their "stick rate" - the number of customers who stay on at a higher interest rate after the promotional period ends - will remain high.

The increased competition means American banks have to fight for customers, says Paterson, while Canadian banks focus more on making back the cost of capital (debt) for their credit card programs, so they aren't as aggressive about offering 0 per cent balance transfer programs.

The U.S. is "a little bit behind," and credit debt is higher
Canada's Interac debit card system is widely used and accepted across the country, giving us ubiquitous, convenient and contactless access to our own cash anytime and anywhere. The American payment infrastructure by comparison relies on older, more analog mechanisms.

"In the U.S., they have been a little bit behind," says Paterson. "They've typically been a cheque-writing culture, and that culture is not as widely accepted outside the U.S. Plus, a cheque requires significant amounts of I.D. and verification at the point-of-sale. So, the credit card is much more prevalent, but this leads to higher debt."

With higher credit card use comes more credit card debt that goes unpaid every month. According to the Federal Reserve, the U.S.'s annual revolving credit rate is 5.2 per cent as of 2016, while in Canada it's 4.1 per cent.

"This is significant because it creates a much bigger opportunity for American credit card issuers to compete over control of those balances," says Paterson.

More education and options in Canada
At the end of the day, Canadians simply don't turn to 0 per cent balance transfer deals because they know they have other options.

"When compared to Canada, the United States' line of credit and personal loan market is not as well developed, so their credit cards are used more often as a borrowing instrument," says Jeff Smith, CIBC's vice-president of card products.

By comparison, Canadians have many alternatives to balance transfers, including lines of credit, which provide a consistently lower interest rate than many credit cards over a longer period of time, and home equity that they can borrow against.

"Canadian consumers are quite well-educated," says Paterson. "The market has really grown in consumer education over the past five to 10 years.

"I think Canadians really get the value of understanding the different types of lending instruments that are available, and with the rising property values, a lot of Canadians have alternatives with home equity products. They can get a very affordable line of credit that's close to prime and even a secured line of credit at very affordable rates."

Different countries, different banking approaches
Banks north of the border also maintain that they are committed to approaching debt management on an individualized basis and will only suggest solutions that will work for each individual customer's financial situation - sometimes that is a balance transfer at 0 per cent interest, but often it is not.

"In Canada and at CIBC, while we do offer some low-rate balance transfer offers to enable clients to consolidate higher-interest balances when it makes sense for them, we believe in providing tailored advice and solutions to our clients to best help meet their financial needs," says Smith.

But given all this, is there any chance Canada's credit card issuers may take a page from the U.S. and start marketing more balance transfer offers in the future? Paterson doesn't think so.

"I think things will generally remain consistent," he says. "The banks in Canada are very much focused on their returns, so I think they'll keep the rates where they are.

"My personal hope is that Canadians get the right advice and pick the right debt solutions for themselves, because that's certainly what we credit unions are focused on guiding them through."

See related: The double-edged sword of balance transfers, 4 common debt consolidation mistakes, Banking, credit differences between the U.S. and Canada
Published November 15, 2016

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