{"id":16236,"date":"2025-01-29T04:38:04","date_gmt":"2025-01-29T04:38:04","guid":{"rendered":"https:\/\/lonecandle.com\/?p=16236"},"modified":"2025-01-29T04:38:05","modified_gmt":"2025-01-29T04:38:05","slug":"the-hidden-costs-of-capping-credit-card-interest-rates","status":"publish","type":"post","link":"https:\/\/lonecandle.com\/?p=16236","title":{"rendered":"The Hidden Costs of Capping Credit Card Interest Rates"},"content":{"rendered":"\n

“The current average credit card interest rate is 21 percent, but it didn’t get there overnight. In 2008, the average rate was 14 percent, at a time when the savings rate was much lower and consumers were overextended. In 2009, a Democratic supermajority in Congress passed the CARD Act<\/a>, bringing a bevy of new regulations for credit card companies, such as requiring advance notice of any rate increases and limitations on fees for late payments.<\/p>\n\n\n\n

Interest rates began rising immediately following the passage of the CARD Act and continued to rise as the risk-free rate\u2014the Federal Reserve’s overnight lending rate, currently about 4.75 percent\u2014fell to 0 percent throughout most of the 2010s. Objectively, credit card interest rates are high today, but they are arguably high as a direct result of legislation passed at the end of the 2000s. Capping credit card interest rates is simply an intervention to correct the results of previous interventions.”<\/p>\n\n\n\n

…<\/p>\n\n\n\n

“There is a reason that credit cards carry a higher average interest rate than mortgages (7 percent) or car loans (8 percent). Mortgages and car loans are secured lending\u2014the bank has collateral in the event of a default which increases recovery rates. Credit card borrowing is unsecured lending\u2014lenders rely on nothing more than trust in the borrower. When losses occur, they are total and catastrophic. Credit card lending is inherently risky. <\/p>\n\n\n\n

The vast majority of borrowers are unprofitable at a 10 percent interest rate. If credit card interest rates were capped at 10 percent, it wouldn’t just disrupt individual finances\u2014it could destabilize the entire credit system. Major credit card lenders, such as Capital One Financial, would likely terminate the accounts of millions of their less creditworthy customers, which could mean anyone with a credit score of 780 or lower. To the extent possible, they might introduce new fees to make up for the loss of interest revenue, but the Consumer Financial Protection Bureau is already taking a hard look at late fees, which can be large relative to small credit card balances. <\/p>\n\n\n\n

Customers who lose access to credit would have to resort to cash or debit cards\u2014and find that it is hard to function in modern society without a credit card. Even renting a car or getting a hotel room are activities that require a credit card.”<\/p>\n\n\n\n

…<\/p>\n\n\n\n

“Interest rates are prices\u2014the price of money\u2014and all prices are signals. Capping credit card rates might sound like a win for consumers, but in practice, it’s a lesson in unintended consequences. Policymakers must tread carefully, weighing the broader economic impacts before introducing well-intentioned but potentially devastating reforms.”<\/p>\n\n\n\n

https:\/\/reason.com\/2024\/12\/04\/the-hidden-costs-of-capping-credit-card-interest-rates<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

“The current average credit card interest rate is 21 percent, but it didn’t get there overnight. In 2008, the average rate was 14 percent, at a time when the savings rate was much lower and consumers were overextended. In 2009, a Democratic supermajority in Congress passed the CARD Act, bringing a bevy of new regulations for credit card companies, such as requiring advance notice of any rate increases and limitations on fees for late payments.
\nInterest rates began rising immediately following the passage of the CARD Act and continued to rise as the risk-free rate\u2014the Federal Reserve’s overnight lending rate, currently about 4.75 percent\u2014fell to 0 percent throughout most of the 2010s. Objectively, credit card interest rates are high today, but they are arguably high as a direct result of legislation passed at the end of the 2000s. Capping credit card interest rates is simply an intervention to correct the results of previous interventions.”<\/p>\n

…<\/p>\n

“There is a reason that credit cards carry a higher average interest rate than mortgages (7 percent) or car loans (8 percent). Mortgages and car loans are secured lending\u2014the bank has collateral in the event of a default which increases recovery rates. Credit card borrowing is unsecured lending\u2014lenders rely on nothing more than trust in the borrower. When losses occur, they are total and catastrophic. Credit card lending is inherently risky. <\/p>\n

The vast majority of borrowers are unprofitable at a 10 percent interest rate. If credit card interest rates were capped at 10 percent, it wouldn’t just disrupt individual finances\u2014it could destabilize the entire credit system. Major credit card lenders, such as Capital One Financial, would likely terminate the accounts of millions of their less creditworthy customers, which could mean anyone with a credit score of 780 or lower. To the extent possible, they might introduce new fees to make up for the loss of interest revenue, but the Consumer Financial Protection Bureau is already taking a hard look at late fees, which can be large relative to small credit card balances. <\/p>\n

Customers who lose access to credit would have to resort to cash or debit cards\u2014and find that it is hard to function in modern society without a credit card. Even renting a car or getting a hotel room are activities that require a credit card.”<\/p>\n

…<\/p>\n

“Interest rates are prices\u2014the price of money\u2014and all prices are signals. Capping credit card rates might sound like a win for consumers, but in practice, it’s a lesson in unintended consequences. Policymakers must tread carefully, weighing the broader economic impacts before introducing well-intentioned but potentially devastating reforms.”<\/p>\n

https:\/\/reason.com\/2024\/12\/04\/the-hidden-costs-of-capping-credit-card-interest-rates\/<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[13],"tags":[1324,217,165,1469,236,551],"class_list":["post-16236","post","type-post","status-publish","format-standard","hentry","category-article-share","tag-credit-card","tag-economics","tag-economy","tag-government-intervention","tag-regulation","tag-regulations"],"_links":{"self":[{"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/posts\/16236","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/lonecandle.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=16236"}],"version-history":[{"count":1,"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/posts\/16236\/revisions"}],"predecessor-version":[{"id":16237,"href":"https:\/\/lonecandle.com\/index.php?rest_route=\/wp\/v2\/posts\/16236\/revisions\/16237"}],"wp:attachment":[{"href":"https:\/\/lonecandle.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=16236"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/lonecandle.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=16236"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/lonecandle.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=16236"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}