Senators from both sides of the aisle claim they are taking on big banks to help the working class by regulating credit cards. Sen. Josh Hawley (R-Mo.) wants to impose a cap on credit card interest rates. Sen. Dick Durbin (D-Ill.) wants to force banks to offer a choice of network over which credit card payments flow. Neither would help working-class consumers – and would almost certainly cost them, as well as numerous smaller banks and credit unions that offer their customers credit cards.
Everyone except the very rich or the exceptionally self-disciplined needs access to credit at various times. That is why most people have at least one credit card in their wallet. Obviously, credit comes at a cost because it costs a lender something to extend a line of credit. While these bills aim to reduce cost to consumers, it is likely new laws will end up imposing a much higher cost – the denial of credit to those who need it and a reduction in the security of payments.
In the case of Hawley’s bill, the Capping Credit Card Interest Rates Act, it is crucial to understand that there are only three ways banks and credit unions can make money from offering credit cards to their customers: consumer fees for the cards, interest rates, or fees levied on merchants who accept the cards. Interest rates are the main way banks can assess the risks of default or late payments from consumers. If you have a low credit score, your base rate will be higher; if you miss payments, your rate will go up.
Capping interest rates would simply mean that these costs would be transferred elsewhere – either to merchants who will pass on their higher fees to consumers (and merchants hate the fees they are charged anyway, as we shall see) or to the consumers in the cost of card fees. If consumers have to pay more in fees, that will almost certainly price some people out of the market.
We have seen when fee caps were introduced on other loan products that it was working class and particularly minority consumers who bore the brunt – finance companies simply stopped offering the products to many in these categories. Lawmakers in Hawley’s Missouri have recognized this economic reality and have refused to follow neighboring Illinois in enacting stringent interest rate caps on small-dollar loans. Researchers from the Federal Reserve and Mississippi State University found loan growth (26 percent) to subprime borrowers in Missouri far surpassed that in Illinois (14 percent) in the aftermath of Illinois’ disastrous price control legislation.
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