Sen. Josh Hawley said he has teamed up with the consummate supporter of every bad economic idea, Sen. Bernie Sanders, to introduce an arbitrary 10% cap on credit card interest rates.
Most economically literate people generally understand that price controls are a bad idea, leading to outcomes such as shortages and rationing of goods and services. But when it comes to credit cards, that understanding of price controls goes out the window.
Sen. Josh Hawley, R-Mo., announced that he has teamed up with the consummate supporter of every bad economic idea, Sen. Bernie Sanders, I-Vt., to introduce an arbitrary 10% cap on credit card interest rates, something that President Donald Trump did float during the election.
However, while Trump is doing a fantastic job of keeping promises, this is not one that should be kept.
First, I want to be clear that credit card interest rates are ridiculously high and generally shameful. I am also not a proponent of using debt for personal spending and believe that balances should only be carried in the case of a serious emergency. I have personally never run a credit card balance month-to-month and advise everyone to only purchase what they can afford.
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But I am also not a proponent of many other things – whether that be gambling or buying expensive new cars – yet I don’t think the government should regulate them just because they are bad personal finance decisions.
And no, I don’t believe in “usury” either, as some like to throw around. But the government has no business getting involved in private credit underwriting/decisions.
While accessing credit is something that in my opinion should only be done for worthwhile investments, it is not my job, nor the government’s, to decide who should get access to credit.
And capping credit card interest at 10% will ensure that fewer people have legal access to credit, as is the very predictable consequence of capping credit card interest.
If credit card interest is capped, particularly in a high-interest rate environment, expect many middle- and lower-class people to not be able to get credit at all.
That’s right – a cap on interest is not going to lower costs for most people – it will raise them for the best borrowers and ensure that those without near-perfect credit don’t get access to it at all from financial institutions. Also, expect companies to charge more access fees to make up for any losses incurred from interest caps.
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When people with lower credit ratings who desire credit are shut out by the banks (and, of course, everyone will scream how that is unfair), what happens? Those borrowers will then seek credit from alternative sources, including from bad actors whose “bankruptcy” and “collection” plans are much less palatable than those of legal financial institutions, often accompanied by a broken arm or nose.
Moreover, anyone who would pick an interest rate cap as a random, hard number not tied to any financial standard (such as x basis points above the Secured Overnight Financing Rate (SOFR), for example) should be entirely disregarded.
Good intentions do not equal good outcomes.
And, while I agree credit card rates are too high and people who can’t afford things shouldn’t be buying them except for emergency situations, that’s for them to decide by their own free will.
The best way to fight against high credit card rates is financial literacy and personal responsibility. The government, which runs deficits near 7% of GDP and has its own debt problem, probably should worry about their debt position first.
