Capping Credit Card Interest Rates?

President Trump announced a one-year cap that would limit credit card interest rates to 10%, in a move that has prompted mixed reaction from lawmakers and beyond, including myself. Elizabeth Warren, the senator from Massachusetts, expressed skepticism about whether Trump could implement such a cap without approval from Congress.

“Begging credit card companies to play nice is a joke. I said a year ago if Trump was serious I’d work to pass a bill to cap rates,” she said. Amazingly, this Senator is actually correct. Constitutionally, only Congress can create laws - a power that they have happily given up.

Allegedly, the restriction would take effect on January 20, but there were no specifics on how such a regulation would be implemented, or insurance that credit card companies would comply. Trump posted, “… no longer let the American Public be ripped off by credit card companies that are charging interest rates of 20 to 30%, and even more.” Senators, Bernie Sanders and Josh Hawley, even introduced a bill nearly a year ago to cap credit card interest rates at 10% for the next five years.

Naturally, the banking industry hates this idea. Hedge fund manager, and Trump supporter, Bill Ackman, posted and then deleted, that such a move would be a mistake, and warned that credit card lenders could cancel consumer cards (probably those with low credit ratings) if they couldn’t charge rates “adequate enough to cover losses and to earn an adequate return on equity”.

Many have accused credit card companies of extortion and loan sharking (i.e., usury). I looked up usury laws. The federal government has no law limiting exorbitant interest rates. That is left to individual states – and the states vary widely in their laws based on rates, amounts of loan, etc. The Tenth Amendment arguably gives that power to the states... as long as transactions are completely within each state. Credit card transactions, more often than not, are interstate transactions. Sadly, they are also exempted from usury laws in every state I looked up.

Personally, I have mixed thoughts on this issue. My credit rating is in the top 20% of consumers. I pay my balance every month. I have one less credit card than the average consumer, yet… my interest rate is north of 19%… on all my cards. That’s insane! I am not a risk. Why can’t my rates be under 10% for the rare times I actually do carry a balance?

Simple answer: I’m paying for all the people who are a risk. It’s just like insurance. The people who are either no risk or a minimum risk, pay for those who are. I understand that credit card companies need to make enough money to cover those who are now more than $1.2 trillion in credit card debt in this country. However, rates just shy of 20% for those who are of no risk is outrageous. On the other hand, no one is holding a gun to my head and forcing me to use a credit card. It’s a privilege granted to us by the banking system.

Source used: The Guardian