Legal Blog

Credit Cards

We all know that if the balance owing from use of a credit card is not fully paid, the financial institution charges interest from the date that the owner uses the card to purchase goods and services from a merchant (i.e. the “transaction date”). The date that the financial institution actually credits the merchant, which may be 2-5 days later, is ignored in the interest calculation. Should this be? By way of class action, a credit cardholder challenged this in Dahl v. Royal Bank of Canada; in 2006, the British Columbia Court of Appeal decided the matter.

Issue

The issue was whether a charge between the transaction date and the date of posting the credit to the merchant could be characterised as interest. If it could, the plaintiff lost; if it could not, then, we gather, that under the Interest Act, the Bank Act, and the B.C. Consumer Protection Act, the plaintiff might have a case.

Interest 

The cardholder’s position was that since banks advance no funds either to cardholders or to merchants on the transaction dates, then there could be no principal amounts on which interest could be calculated. The banks countered by saying that they advance credit to cardholders on the transaction dates by undertaking to pay the merchants. They are obliged to pay the merchants because, upon presentation and acceptance of the credit card, a cardholder’s obligation to a merchant is absolutely discharged.

Accordingly, there were two questions: could the banks legally charge interest on credit, as opposed to funds actually advanced to the merchant; and is credit advanced to the cardholder on the transaction date?

Agreements 

There are three main agreements in play on a credit card transaction:

1.   The agreement between the bank and the cardholder;

2.   The agreement between the bank and the merchant; and

3.   The agreement, usually oral, between the cardholder and the merchant.

The Court held that the problem with the cardholder’s argument was that the argument assumed that these agreements were all one agreement, rather than three separate agreements.

The Court reviewed the cardholder agreements of RBC, CIBC, and Bank of Montreal. These agreements made it apparent that the banks charged interest from the transaction dates and that they charged interest on the advances of credit. Accordingly, the fact that there were also agreements with the merchants allowing the banks to credit the merchants within 2-5 days of a transaction date was irrelevant.

The Court dismissed the class action.