That’s exactly what would happen, if new legislation proposed by Bernie Sanders and Alexandria Ocasio Cortez passes. Bernie and AOC announced new legislation to cap credit card interest rates at 15%. It’s a move they say is designed to “help protect consumers from the greed of the credit card and banking industries.”
A better description would be protecting us from ourselves, after all, nobody forces you to apply for a credit card, let alone start charging on it and then not paying it off every month, because as we all know, if you pay off your card every month, you don’t get charged any interest. But apparently we as consumers, can’t do that, so it’s Bernie and AOC to the rescue.
On the surface as a credit card customer myself, this sounds great. For those of us who use a card and don’t pay of our balances every month and pay above 15% interest, it will save a lot of money….but here’s the problem with this plan.
If you cap the rate at 15% the banks will no longer afford to give credit cards to those who Bernie and AOC say are in most need of credit cards…low and middle income families. The risk of default will be too high. That’s why high risk card holders are charged higher rates than low risk card holders.
The banks are in business to make money, not lose it. They also must make their shareholders happy and you don’t do that by losing money on credit card customers who don’t pay off their balances.
The biggest problem I have with this plan, is this…Who in the world do Bernie and AOC think they are, to think they can tell anyone how much profit they are allowed to make on services the business offers?
I had a discussion with a bar owner recently who is in favor of capping the interest rate at 15%. If you’re in favor of this, I will ask you the same question that I asked him.
As a business owner, would you be in favor of capping what you charge for a service, like serving alcohol at 15%? I pointed out to him, that a bottle of vodka he sells in his bar costs about $30, so the profit on a bottle of Vodka would be about $34.50. As anyone who has ever paid for a martini knows, the actual profit on a bottle of vodka or gin is actually closer to three or four hundred percent.
So how could he be in favor of capping the profit that a credit card company makes at 15% and not also be in favor of capping his services at 15%? He didn’t have an answer.
There are so many problems that weren’t thought out with this proposal. Why did they choose an arbitrary number like 15%? Why not 10% or 5% or prime plus 1%? If you’re going to help consumers and screw businesses, let’s really do it.
Banks are going to make their money some way, plus there are ways to get around the 15%. They can charge $20 or $30 a month in service fees or instead of making it free to have a card they can do like some banks already do and charge a yearly sign-up fee of a couple hundred dollars.
However if Bernie and AOC truly are serious about helping consumers by capping the rate at 15%, why not include in the proposal that the government will cover all defaults on credit cards. Banks would probably be fine with that, knowing they didn’t have to cover any losses and could just count on the 15% profit margin that they would be guaranteed. But as we all know, if the government is covering the losses, what that really means is that you and I and our taxes are covering the losses.
If they really wanted to help consumers and this was truly all about helping people, they would have introduced legislation that requires at least a 670 credit rating to even get a credit card. Think about it, if credit rating isn’t good enough to get a credit card your interest rate is 0….and 0 is way better than 15%
If you have thoughts or comments, email me at mike@kboi.com
