By CCN.com: 2020 presidential hopeful Bernie Sanders and his democratic-socialist protégé Alexandria Ocasio-Cortez are trying to introduce a bill that even AOC describes as “radical.” ...
By CCN.com: 2020 presidential hopeful Bernie Sanders and his democratic-socialist protégé Alexandria Ocasio-Cortez are trying to introduce a bill that even AOC describes as “radical.”
The bill would cap all credit card interest rates at 15 percent. Right now, the average banking institution is charging an interest rate of roughly 17 percent on the cards it issues, though interest rates, according to AOC, allegedly balloon high as “30 or 40 percent” in some cases.
In a Facebook livestream, the pair referred to the situation as “economic brutality,” citing people that make “millions and millions of dollars a year” (hey, that sounds like Sanders, per his 2016 and 2017 tax returns), and “banks that make billions of dollars a year in profit.”
Similar laws that capped interest rates were in place in the U.S. up until 1978, when the Supreme Court ruled that individual states could enforce their own laws regarding credit cards and their respective interest rates.
There are two big things wrong with the plan – three if you count the fact that neither AOC nor Sanders has explained how they seek to enforce such a law.
The first is that capping interest rates will strangle competition in our financial markets. Banks compete by setting different interest rates on items like credit cards, home loans, and business loans.
Roughly 183 million Americans own and utilize credit cards to pay for goods and services. By setting different standards regarding interest rates, banks have more room to use differentiated interest rates to attract customers and potentially earn their business, beating out their competitors.
By having a set maximum rate on all cards, consumers have fewer choices regarding what credit cards they will take. Competition is destroyed, and banks would likely suffer financial losses down the line, shaking up the U.S. economy.
The second problem – and the one that is far more insidious – is that capping interest rates could potentially prevent low-income individuals or people with poor credit from purchasing what they need to survive.
Higher interest rates protect banks and financial institutions when a customer’s payment history is either weak or tarnished.
At the same time, higher interest rates allow these banks to underwrite credit cards, mortgages, and other loans to risky individuals. By agreeing to a higher interest rate, these customers obtain access to the money they desperately need while giving banks enough incentive to run the risk that they will default on their credit card payments.
By capping interest rates, banks will no longer have the same protection they once did against faulty or poor credit individuals, which could make them less likely to lend money or offer financial resources to people with less-than-stellar payment histories.
Consumer Bankers Association president and CEO Richard Hunt claims:
“Arbitrary, one-size-fits-all caps would make all loans ranging from home mortgages to auto loans to college loans harder for Americans with lower credit scores or non-traditional sources of income to receive.”
Jeff Sigmund, a spokesperson for the American Bankers Association, offered similar commentary. He warned that America is currently enjoying a “highly competitive and vibrant” credit market. He says that by implementing interest caps and limiting card choices for consumers, credit will become more restricted to “those who need it the most.” He also comments that they would be driven to “less regulated, more costly alternatives.”
Sanders and AOC claim they’re working against companies that “prey on the poor.” In reality, they’re the ones virtue-signaling their constituents back into the poor house.