Just when the credit card industry thought it might get a break for a year from new legislation out of Washington, Rep. Maurice Hinchey (D-NY) provides yet another aggressive proposal. He wants to cap credit card interest rates at 15%. While this sounds great from a naïve consumer's perspective, it would probably do more harm than good.
In a statement, Hinchey explains his intent:
"Many hardworking Americans are using credit cards to make ends meet in this recovering economy, but credit card companies are finding new ways to squeeze the middle class despite significant reforms in the last Congress," said Hinchey. "Credit card companies are charging interest rates as high as 50 percent, trapping millions of Americans in a spiral of debt, forcing bankruptcies, and ruining peoples financial futures. We need to put an end to this legalized loan sharking. A fair and healthy lending system is critical to the success of hardworking Americans and the recovery of the economy. This bill helps limit credit card and general lending abuse by placing a reasonable cap on the rates that can be charged to Americans."
To be sure, 50% interest rates sound terrible. But then, most borrowers who face such excessive interest rates agree to pay them. Borrowers understanding the interest rates they face are more likely now than ever, after 2009's credit card regulation bill forbid companies from arbitrarily increasing interest rates. So at this point, borrowers who pay such rates do so by choice.
Why would anyone pay such a rate? They must really need the money, and they must have really terrible credit. While it's easy to feel sympathetic for a person in a tough place who would have to resort to paying such ridiculously high interest rates, the alternative would be worse.
If credit card companies face a cap, then people with relatively bad credit who would have been forced to pay a higher rate than the cap permits would simply be priced out of the market. Banks and finance companies would refuse to provide cards to these consumers, because the interest they would be permitted to charge would not cover the default risk they would face from these borrowers.