I'll be the first to admit I am the sort of person who reads a lot of headlines, but doesn't ever get around to reading the actual article. I'll also be the first to admit that can be a very dangerous thing to do in this day and age. The media has proven time and again that they are simply in it for the "clicks" and as has always been the case, shaping the narrative to a particular viewpoint is never off the table.
However, this post isn't about whether or not you can trust what you see in your news feed. Instead, this post is actually about one of those headlines that I saw.
I often find myself flipping through my news feed late at night when I am getting ready to go to bed. My Pixel phone has this really awesome feature where it allows me to swipe left from the home screen and see a list of curated content for myself. I actually don't remember if that is where I saw this headline or if it was something that popped up on Facebook, but the headline claimed that several politicians from both side of the aisle were in favor of a limit on credit cards to 10% interest.
At first glance, this might seem like a really good thing. First of all, you have politicians actually agreeing on something and these days that is just about as rare as finding a news story you can trust. Then, on top of that you have the fact that they might be capping credit card interest rates to 10%. That's pretty huge. Especially given the fact that I recently got an add for a credit card in the mail and the base rate for the card was something like 28% interest.
Let's say you were to get that card and put a balance of $10,000 on it. Then let's say you can only afford to put $250 per month towards the payment for it. At an interest rate of 28%, it would take you nine years and ten months to pay that off. That's assuming you don't keep charging stuff to that card.
Pretty crazy right? Ten percent is sounding a lot better now isn't it? With a 10% interest rate, you cut your time almost in half taking four years and one month to pay off the card. Again, that assumes that you aren't charging more to the card.
And that's where the problem lies.
I think we can all agree a 10% cap on credit cards isn't going to make people spend their money smarter, it's just going to make them spend money they don't have more. My fear is that a cap at 10% will cause people to feel even more entitled with the way they throw away their money. Don't get me wrong, it's their money, if that is the way they choose to live, then so be it, but this really shouldn't be seen as the boon that it is being sold as.
I've made no secret of the fact that @mrsbozz and I had some decent financial struggles when we first met. I had my hours reduced to part time for a while and though my salary had been cut in half, I didn't do much to cut my spending in half. @mrsbozz was a bit better than me, but she had student loans from her graduate degree and some other more reasonable debts that she had acquired.
We were a good $25,000 in debt before we were even married. Thankfully, we had the ambition and wisdom to sign up for a debt consolidation loan. Those interest rates that were in the 20% range suddenly dropped to the 6% range (rates were so good back then!), and we were able to pay off the five year loan in just three years becoming one step closer to being debt free.
Ideally, people would take advantage of the capped rates to perhaps consolidate their debt a little bit and dig themselves out of the hole they are in, but as I said, I think we can all agree it will give many the green flag to just spend more.
@tarazkp has written many good posts talking about the fact that we are a world of consumers and for most of the world instant gratification takes abject priority over pretty much anything else. Changing the penalty is going to have very little impact towards changing the behavior. Personally, I think this is all focusing on the wrong thing.
I do concede there are likely some who would benefit from a move like this. Sadly, I think they are the minority and a smarter track would be educating people about the dangers of interest in general. It's not just high rates that can come back to bite you. Remember, banks really only make their money one way.
What do you think? Is this 10% cap on interest rates a good idea or is it simply putting a bandaid on a hemorrhage? Nevermind the fact that you are now messing with these companies bread and butter. I don't see any way the corporate lobby allows this to pass into existence.
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I think 10% cap is a great idea. Many folks, including myself have been pushed to using cards for various reasons, unexpected healthcare, moving, home repairs, etc. Yes, we could do without some things that are convenience, like washing dishes by hand instead of fixing dishwasher.
The big thing for me is it's just wrong to charge 28%. I mean really? That is just usery and greed, and often gets many into a hole they can't get out of, just as you said. But really, what other industry or business has that kind of profit margin?
I remember back when checking accounts earned 6% interest and savings accounts earned 10% interest, and the credit card interest was less than that. How did this flip and such a wide gap difference occur? hmmm.
My first credit card was through my credit union and it charged something like 9% interest. It was amazing and I should have just stuck with that one. Now, that's basically the only one I use, but the rate has gone up a bit as is the case across the board. I think for people like me and you, the 10% is probably a great idea, unfortunately, most of the world doesn't have any money skills these days and I have a feeling while it could boost the economy, it might just equate to a slower demise for some.
And there was me reading but really wanting to know about the series of hole pics🤣🤣🤣
Those are from back in 2020 when we had a pipe break in our front yard. It happened again a couple of years later in a different spot. I wrote posts about each of them.
I like the cap, because while I don't think it will make people spend any less, it will make a little less profits for the banks over time, and therefore a little less inflation through debt perhaps. Though, 10% is still too high! Mine is 12% at the moment - but I have no debt on it, other than online payments that come out occasionally for software - so I pay it off monthly.
The real question is... the hole?
Haha, everyone wants to know about the hole! Those are from a post I made back in 2020 when we had a pipe break in our front yard. I'm not going to complain about a cap at 10%, but I manage my money better than most. Heck, I was annoyed by the 6% rate on our recent car loan. I think it's way too high!
A lot of folks like to condemn interest as usury, but there are reasons for a lot of it. Inflation means dollars tomorrow are worth less than today. Credit card infrastructure costs money to install and operate. People default on debt, leading to outright losses or added costs for prosecution. And, of course, corporate greed isn't a fantasy.
On the other hand, interest rates are a price for money over time, and as you noted, price signals matter. When government sets an arbitrary cap, no matter how "reasonable" it seems at a glance, it distorts the market and alters consumer behavior while changing the incentives for production and investment.
No matter what school of economics you explore, you find almost universal understanding the price controls are always destructive. The exceptions usually just mean arguing that in a particular pet case, it totally doesn't matter because.... Look over there, something shiny!
Those are some fair points. I'm not entirely sold on the credit card infrastructure though. It seems more and more places are passing those fees on to the consumer. Perhaps that is where the government should be focusing their attention if they want to regulate something!
If people want the convenience of a card, let them pay the fees. I prefer to pay cash or debit.
This made me confused, if you don't mind from what country are you? (So I could check to enlighten myself)
I was wondering about those interests, isn't it supposed there is none when paid on time?
Yes, there is none when you pay your bill on time. Most people get themselves into debt so bad they can't manage that. I'm from the US.
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Good enough
I never used credit cards this way. My main use case for cards is to run everything I can through them to accumulate maximum cash back rewards and pay everything off every month.
If people are carrying balance on a card 10% is still pretty high when mortgage rates are at 6%. I would think 8% would be a better target to shoot for.