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The pros and cons of AOC and Bernie 15 percent credit card rate limit

Posted on May 10, 2019 by Paul White

The democratic leadership, Bernie Sanders and AOC.  Have introduced a bill that would cap Interest rates on Credit Cards at 15%.  To anyone with credit card debt this sounds like a great idea.  Here is how it will affect the overall economy.

The average American Family sits with at least a few grand on credit cards.  Some people who can't control their spending sit with their cards maxed out every month, and only make minimum monthly payment each month.  For people who maintain balances on their credit cards, this would be a huge windfall.  Suddenly they have more money in their pockets.

Of course capping interest rates at 15% does nothing to fix the problem.  The problem is not high interest rates, but rather people who are not responsible with their money.  They continue to spend and consume until they run out of credit.  Eventually they end up either bankrupt, or just making minimum monthly payments, which is exactly where the Credit Card companies want people to be.  Currently some credit cards are charging almost 30% interest.  

All this money the credit card companies make goes to profits and to programs to attract more customers.  Fancy rewards programs that those of us who pay off our credit cards each month enjoy, might not be so generous if profits are down.  Currently my own credit card pays me 1% cash back on everything.  2% on grocieries and wholesale, and 3% cashback on a category I get to select. In my case I select online shopping, which I do quite a bit of.  The Credit card companies don't make any interest off me because I pay off my card each month.  As matter of fact, they might even loose money on me.   They can afford to do this because they make tons of money of people who maintain balances on their credit cards.  But if they can not longer charge the high interest rates they are used to charging, they won't be able to afford to keep giving rewards to everyone else.  

The other possibility is with Interest rates capped, credit card companies might start denying people with lower credit scores.  Or they will issue cards with a much lower Max balance.  They effectively will be forcing many people to go back to a cash economy.  This will have a negative impact on spending.  There is a phycological side to spending on a credit card, as you swipe and go on your way.  All without putting much thought into how much you have spent.  When you spend cash, you are giving up something physical, this tends to make people think twice before spending.  

In my opinion this has the possibility of reducing consumer spending by up to 10% annually.  Think of all the holiday shopping, that people throw onto credit cards.  With a lower Max, people won't be able to buy as much stuff, or they will be forced to spend with cash. Which as I pointed out earlier will cause people to spend less.  

The last thing you want is an economy in which credit gets tighter.  This happend after 2008 with the housing crash.  When banks stop lending.  There is a trickled down effect.  The same thing would happen with credit cards.

On the bright side. Lower interest rates push up the price of goods.  Homes are good example of this.  The lower the interest rate of a mortgage.  The more house you can buy for X dollars per month.  But there is another side to this.  When lenders calculate how much home you can buy they calculate your debt to income ratio.  If a person is suddenly only paying 15% interest on their credit card balances, rather than the 25% - 30% they are paying now. This helps their debt to income ratio.  Which means people who used to be denied, will be suddenly approved.  And people who were formally approved, can not be approved for a higher monthly payment.  This over time will push home prices up higher.

However in the end lower interest rates, just encourage consumption with money you don't have.  People view this is having more money, but in fact your dollars are just worth less.  The entire stock market has been driven by low interest rates.  

Politically I actually like this bill.  I am conservative, but there is a point where I think some price controls are not a bad thing.  Freedom is a good thing, but unfortunately it allows some people the Freedom to hang themselves with debt.  The best part is if this gets passed, it opens the door for other price controls.  Which if we can go after the medical community with the same tactic this could be a great way to cut prices in healthcare.  Maybe finally Hospitals won't be able to charge 2 ounce bottles of infamil to your insurance at a 2000% price markup.  That is where the real corruption is.  

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