People like Bernie Sanders, AOC (I’m not spelling that nonsense and I don’t do dashes), and even some Republicans like Tucker Carlson have jumped on the bandwagon in attacking credit card interest as predatory, unfair, and even immoral. But these proposals ignore the role of personal responsibility and the consequences of their bill.
Government intervening in the free market is what gave us the housing and student loan crises. When people don’t feel the true cost of the product it distorts the market. For example, students don’t really notice or care about tuition as much because they can get Pell grants and low-interest loans to cover it. So schools can raise rates with little negative consequences. Housing officials were told to override traditional credit concerns and give people houses. The resulting bubble required a government bailout where people who couldn’t afford houses in the first place were subsidized by taxpayers who could.
Interest rates are based on a variety of factors including the likelihood of the money being paid back. Credit cards are the easiest way to finance items you can’t afford and Americans use them irresponsibly. The average household has over 5,000 dollars in debt and credit card-using households have close to 10,000 dollars in debt. Capping interest rates will mean that the least responsible borrowers will have less incentive to pay back their loans and responsible borrowers will end up paying more to subsidize the irresponsible. So when people buy the new barbecue grill they can’t afford they won’t pay as much for it. But the responsible credit card user, who only pays for unexpected emergencies on his/her card, will have higher interest rates than they normally would and pay for that other guy’s grill. And this is because credit card companies will have to charge more interest on average in order to meet this cap.
It doesn’t sound very fair to punish more responsible borrowers to help the irresponsible ones but politicians sell it to the people by blaming the evil big banks that only get 3 percent interest on loans from the government. (The assets of banks make them a much safer loan than credit cards in the hands of private individuals so there is nothing nefarious about the difference in rates, but big banks are an easy target and nobody can question the poor choices of the poor.) In other words, politicians promise to save you a problem that is largely based on irresponsible borrowing.
Instead of blaming the big banks we should instead expect Americans to stop financing their lifestyles with high-interest credit cards. We should definitely avoid subsidizing the poor choices of Americans by punishing responsible borrowers. Most of all, we need our politicians to have a backbone and stand up for capitalism which drove the American economy. Interest rates are not the horrible enemy of the people, but are an important mechanism in encouraging people to pay back short-term loans or not making them in the first place.
