Should the government cap credit card interest rates? | The Tylt
Bernie Sanders and Alexandria Ocasio-Cortez have introduced legislation that would cap interest rates on credit card loans. According to the Washington Post, the average interest rate for people with low credit scores averages around 24.99%, and Americans are more than $1 trillion in credit card debt. Sanders and Ocasio-Cortez say capping the rate will help people end the predatory cycle of debt. Members of the banking industry say the proposal would unsettle the entire industry. What do you think?
Should the government cap credit card interest rates?
Sanders and Ocasio-Cortez claimed credit card companies are taking advantage of people who may already be in financial trouble, perpetuating an inescapable cycle of debt. Per CNN:
Their new bill, called the Loan Shark Prevention Act, would cap the interest rate on both credit cards and consumer loans, while giving the Federal Reserve authority to temporarily allow a rate increase if the "safety and soundness" of a lender is threatened. It's similar to how existing legislation regulates loans made by credit unions. It would also allow states to set lower caps.
Currently, the average credit card interest rate is 17.7%, according to CreditCards.com. Americans with poor credit scores tend to be offered higher interest rates. Maximum rates tend to be well over 20%.
Members of the banking industry argue an arbitrary cap on credit card interest rates would actually hurt those seeking loans. The Washington Post reports:
“This specific proposal will only harm consumers by restricting access to credit for those who need it the most and driving them toward less regulated, more costly alternatives,” Jeff Sigmund, a spokesman for the American Bankers Association, said in a statement.
Richard Hunt, chief executive of the Consumer Bankers Association, another industry group that includes JPMorgan Chase and Bank of America, called the 15 percent cap “arbitrary.” “One-size-fits-all caps would make all loans . . . harder for Americans with lower credit scores or non-traditional sources of income to receive,” he said in a statement.
Art Carden, an associate professor of economics at Samford University, argued in Forbes that decreasing the interest rate will cause people to rush to obtain credit card loans. At the same time, Carden claims, credit card companies will decrease the number of loans they are willing to provide.
[A] price ceiling raises the quantity of loanable funds that borrowers demand. People want to borrow more at 15% than 25%. A cap would mean people seeking more loans. That looks like a good thing as it means more people seeking credit cards and, therefore, the opportunity to build a credit history. Think about arguments in favor of minimum wages that emphasize the increase in the number of people who might want jobs.
A price ceiling affects the supply side of the market, too, and an interest rate cap of 15% is going to reduce the number of dollars banks are willing to lend. The increase in quantity demanded combined with the reduction in quantity supplied means a shortage in the market for loanable funds. Holding everything else constant, the interest rate cap reduces people's access to credit.
Sanders and Ocasio-Cortez's plan accounts for this possibility, as the Intercept reports.
The answer, to Ocasio-Cortez and Sanders, is postal banking, which several Democratic presidential candidates have endorsed. Letting the nation’s 31,000 post offices issue simple bank accounts and even short-term loans would solve numerous problems, particularly for the over one in four households who have little or no access to banking services, which lead them to use high-cost alternatives. Returning to a postal banking system, which as many as 4 million Americans enjoyed when it was in place from 1911 to 1967, could promote financial inclusion, save billions of dollars for vulnerable populations, and help modernize and stabilize the postal system — a nationalized entity written directly into the Constitution — in an era of electronic communication.
“We must make sure that giant Wall Street financial institutions are not the only way Americans can gain access to banking services,” the Sanders and Ocasio-Cortez statement reads. “Together, we are going to put predatory lenders out of business and provide affordable banking options to all Americans.”