AOC and Sanders call for capping credit card interest rates at 15%

[Gingersnap]

AOC and Sanders call for capping credit card interest rates at 15%
by Colin Wilhelm
| May 09, 2019 01:14 PM

Bernie Sanders and Alexandria Ocasio-Cortez will introduce legislation to create a national cap on interest rates for credit cards.

The Sanders-Ocasio-Cortez legislation would limit credit card annual percentage rates to 15%. Current credit card annual percentage interest rates typically range from the mid-teens to high 20s, depending on a person’s credit score.

“Every major religion on Earth ... has condemned usury because it is really disgusting,” said Sanders, a Vermont independent senator who is also a leading candidate in the Democratic presidential primary. “What Alexandria and I are proposing in this legislation is not complicated ... Bringing back the concept of usury laws, where banks cannot try to get blood out of a stone.”

While this seems useful at first glance, I don't think it really is when you think about it. Credit card companies are essentially making bets: you bet you'll pay it off before the interest kicks in or within a very short time, they are betting that you will make the minimum payments. If interest is capped, why wouldn't companies severely restrict credit to make a safer bet? Better to get 15% from customers who always pay on time and are never late than to extend credit when the customer has a spotty work history or has too many late payments which could end up in collections.

I remember when credit was difficult to get. You had to start out with a store card (Sears was our credit foundation). You bought one item a month and paid it off. Everything else was cash or check.

This would also impact small business since a lot of starting business owners use credit cards to float their initial investments. A huge number of businesses fail within 18 months but not all. Without that access to money, how many can afford to start? Many are very small initially - they can't get a bank loan.

How many people will be cut out of credit with this scheme? Sure, the lower middle and working class can go back to cash but what would be the impact? Not the "we can't go on vacation" thing but the "we can't help buy your food truck" thing?

Wash Ex

[80zephyr]

I'm on board with it. Back in the day, there was a term for anyone who would charge a 25% interest rate.

Loan shark.

Mark

[Gingersnap]

I'm on board with it. Back in the day, there was a term for anyone who would charge a 25% interest rate.

Loan shark.

Mark

But why do loan sharks exist? If everybody is frugal, manages funds responsibly, lives below their income, and never needs immediate money, why do these instruments exist?

The answer is that people don't live that way.

We are getting rid of payday loans out here because they prey on the poor. Well, yes and no. If you get one to pay for keeping your beater car running so you can work, it's a good deal. I mean, if you are in that position there is obviously no family member or friend you can tap for that radiator replacement. What are you going to do? Quit your job?

If you use them to buy drugs or alcohol, obviously that's stupid.

So, we jettison the really needy to protect the abusers?

I've been poor. While much is self-generated, some isn't. All these 'predatory lending' things look awful to people who will never have to use them but they do serve a purpose - just like old school loan sharks.

Yes, people use this stuff badly. Not everybody does.

Now, we can go back to cash and carry. I could easily as could many here could but that isn't true of a lot of people. They can make minimum usury payment but they can't pony up the cash for four new tires or that new hair-braiding shop.

[Newman]

I find the words AOC and Sanders use to describe the evil money changers applies more than perfectly to themselves.

[80zephyr]

But why do loan sharks exist? If everybody is frugal, manages funds responsibly, lives below their income, and never needs immediate money, why do these instruments exist?

The answer is that people don't live that way.

We are getting rid of payday loans out here because they prey on the poor. Well, yes and no. If you get one to pay for keeping your beater car running so you can work, it's a good deal. I mean, if you are in that position there is obviously no family member or friend you can tap for that radiator replacement. What are you going to do? Quit your job?

If you use them to buy drugs or alcohol, obviously that's stupid.

So, we jettison the really needy to protect the abusers?

I've been poor. While much is self-generated, some isn't. All these 'predatory lending' things look awful to people who will never have to use them but they do serve a purpose - just like old school loan sharks.

Yes, people use this stuff badly. Not everybody does.

Now, we can go back to cash and carry. I could easily as could many here could but that isn't true of a lot of people. They can make minimum usury payment but they can't pony up the cash for four new tires or that new hair-braiding shop.

OK, should the poor folks that need tires pay 100% interest? After all, otherwise they would have to quit their job.

Mark

[80zephyr]

One more thing that bothers me about credit card companies. They charge the business for the transaction. Usually 2 to 3%.

They are getting paid from both directions, I doubt they need to make more than 15%

Mark

[Lady Marva]

One more thing that bothers me about credit card companies. They charge the business for the transaction. Usually 2 to 3%.

They are getting paid from both directions, I doubt they need to make more than 15%

Mark

Not the point. The point is that an arbitrary legislated interest cap doesn't allow the market to ebb and flow as needed.

[80zephyr]

Not the point. The point is that an arbitrary legislated interest cap doesn't allow the market to ebb and flow as needed.

I agree with that...to a point. There are really only 3 major credit cards out there, and I have a feeling none will "rock the boat".

Mark

[Lady Marva]

I agree with that...to a point. There are really only 3 major credit cards out there, and I have a feeling none will "rock the boat".

Mark

Perhaps. But don't forget it trickles down to credit company loans, bank loans, short term credit for buying inventory and business supplies.

As with most things, whack-a-mole here and the effect is on something else.
No thanks to dictates by gubmint employees!

[Gingersnap]

OK, should the poor folks that need tires pay 100% interest? After all, otherwise they would have to quit their job.

Mark

I doesn't really work that way or it certainly doesn't have to work that way. These loans are designed to get you through a couple of weeks between paychecks. They aren't designed to be long-term debt instruments.

Sure, some people do misuse them. I don't know how you get around that. Somewhere out there, somebody is using a toothbrush in a dangerous or morally questionable manner.

Most people are using little loans as intended. Yep, they do pay ridiculous interest after the first week but what's the alternative? Corporate Giant Bank isn't going to loan a 20 year old dishwasher $200 bucks for two weeks. The labor costs for processing that loan all the way down the line exceed the loan value itself let alone the interest. A bank loan, even if you can get one for that amount, will take more than one day while a payday loan takes 20 minutes tops.

Bad interest rates are bad. How well I know. But at certain times, bad interest rates are a lot better than no loan at all. We can't and certainly shouldn't force banks to lend by law - that's a recipe for disaster so they will adjust their lending to circumstances. Capped interest will necessarily close some borrowers out of the market. Just as getting rid of payday loans will make some people use illegal lenders.

The market never goes away regardless of what regulators or politicians do.

[Novaheart]

....... Credit card companies are essentially making bets: you bet you'll pay it off before the interest kicks in or within a very short time, they are betting that you will make the minimum payments.

If I hadn't worked for mega-bank I might agree with you. I had a young man quit about a week after he made it from training to the floor. He said , "I am Catholic (childhood Cuban immigrant) and I cannot treat people this way."

27% interest to the least wealthy customers and 0% floats to customers with New York addresses. $35 late fee on a $500 balance. Automatic re-submission of checks so mutiple fees attach. And don't get me started on the insurance scams.

[Gingersnap]

If I hadn't worked for mega-bank I might agree with you. I had a young man quit about a week after he made it from training to the floor. He said , "I am Catholic (childhood Cuban immigrant) and I cannot treat people this way."

27% interest to the least wealthy customers and 0% floats to customers with New York addresses. $35 late fee on a $500 balance. Automatic re-submission of checks so mutiple fees attach. And don't get me started on the insurance scams.

Oh, I'm not saying they aren't scum - most are but there's no business practice that doesn't work the margins for increased profit. Even government does this. That's an ethical problem.

The economic bets are a market force. They exist whether the market is full of saints or full of sinners. As history has demonstrated over and over with both sets.

Top down control just never seems to work. It sounds good. It just never seems to play out as intended.

A smarter option would be 4 years of mandatory financial education in schools. You may never have sex or need to know the square root of 100 but by God, you will pay debts, use credit, and have to figure out insurance, retirement accounts, depreciation, learn to budget, and do your taxes.

This wouldn't end the need for high risk loans (that will never end) but a more educated populace will shop their banking needs better and make different decisions in terms of lifestyle which might avert their need for predatory lenders.

[Novaheart]

Oh, I'm not saying they aren't scum - most are but there's no business practice that doesn't work the margins for increased profit. Even government does this. That's an ethical problem.

The economic bets are a market force. They exist whether the market is full of saints or full of sinners. As history has demonstrated over and over with both sets.

Top down control just never seems to work. It sounds good. It just never seems to play out as intended.

A smarter option would be 4 years of mandatory financial education in schools. You may never have sex or need to know the square root of 100 but by God, you will pay debts, use credit, and have to figure out insurance, retirement accounts, depreciation, learn to budget, and do your taxes.

This wouldn't end the need for high risk loans (that will never end) but a more educated populace will shop their banking needs better and make different decisions in terms of lifestyle which might avert their need for predatory lenders.

One of the most plausible arguments is that if we cap loan rates at 15% then the banks will charge everyone 15%. IT's plausible, perhaps even likely, but it's also an attempt to divide the issue along credit scores. Internal training at megabank was that the bank needed to make an average of 12.5% on credit cards to "make a profit". So we should take them at their word as well as taking the warning and at most set the rate at 12.5%.

What I really want to know is how a 7-11 changes hand three times in ten years and stiil makes a profit for the newest owner. Where are the poor refugees getting the cash to buy businesses?

[Gingersnap]

One of the most plausible arguments is that if we cap loan rates at 15% then the banks will charge everyone 15%. IT's plausible, perhaps even likely, but it's also an attempt to divide the issue along credit scores. Internal training at megabank was that the bank needed to make an average of 12.5% on credit cards to "make a profit". So we should take them at their word as well as taking the warning and at most set the rate at 12.5%.

What I really want to know is how a 7-11 changes hand three times in ten years and stiil makes a profit for the newest owner. Where are the poor refugees getting the cash to buy businesses?

They are pooling extended family resources. They are betting that the investment will generate a mutually profitable return. They are often right, it will. This is a very old strategy but not one common among X generation Americans. It is common elsewhere and was common here until the New Deal era.

But it depends on large, tightly knit families. You can't pull it off with 1 kid and no aunts and uncles.

As far as interest goes, it's complicated - as I'm sure you know. The bet is on what most people do. Most carry a substantial debt, treat it as "normal" like a utility bill, and never expect to pay it off. That's what banks/credit "bank" on and it does pay off handsomely.

Nobody has to do that. Not playing along is difficult - more emotionally than practically. I have lived right on the bone and it's not fun but it isn't undoable. The worst part is the peer pressure. They are buying, eating, wearing stuff and traveling and putting it off on credit. That's not wrong but it isn't always smart. However, resisting that can be hard.

Nobody admires the person who has no consumer debt but who never buys trips or expensive toys.

Extensive education will be a start in changing that.

[Newman]

One of the most plausible arguments is that if we cap loan rates at 15% then the banks will charge everyone 15%.

I heard that. Frankly I'd guess that reality will be much more complicated. But the principle is exactly right: regulations will be tailored and exploited, and the results will have unintended (" and ") consequences....

I cringe when I see someone in a 7-11 store, say, take $20 out of an ATM, pay a $3 fee there, and likely a fee on the other end, too.

Usury laws exist because clever people with pencil and paper skills will take cruel advantage of people without, and as a society we don't consider that a fair contract. I'd count that ATM transaction as an example. A poor schlub ends up perhaps paying 30% up front to get his own twenty dollar bill.

I haven't thought much about this new proposal for government minding. AOC may know almost as much as I do about usury and such, considering she graduated near the top of her class from Boston University, with a major in economics. But I also know that government control of prices never works well. I don't know if Boston University covers that part of Econ 101 or not. Probably not.

I agree with that...to a point. There are really only 3 major credit cards out there, and I have a feeling none will "rock the boat".

Mark

The "tell" is usually the reaction of the major players targeted for regulation. I don't know, but I'd guess they are much less opposed than you'd imagine, and probably suggest "working with" regulators to be more self-righteous than ever. Farmers "working with" the foxes seldom works out well for the chickens.