Sanders-Ocasio-Cortez plan to cap credit card interest rates will backfire on consumers
Senator Bernie Sanders and Rep. Alexandria Ocasio-Cortez recently introduced their first joint piece of legislation — a proposal to impose a national interest-rate ceiling of 15% on all consumer credit products, from credit cards to payday loans. They promise that capping interest rates on credit cards and other consumer loans will benefit working families, but history indicates the benefit will come at the expense of everyone else — especially the half of all households who pay their balances every month.
The ubiquity of general purpose credit cards (such as Visa and MasterCard) for middle-class Americans is a relatively recent phenomenon. In 1970 only 16% of American households had general purpose credit cards, and only two percent of low-income households, primarily because restrictive interest-rate ceilings made it too risky to lend to all but the wealthiest Americans. Credit card issuers offset their inability to charge a market rate of interest by imposing annual fees or bundling credit cards with other products such as checking accounts (which carried higher monthly fees in states with more restrictive usury ceilings). But consumers hate annual fees, especially those who do not carry balances but were forced to subsidize those who do. Moreover, annual fees were highly regressive, as every consumer paid the same annual card fee regardless of whether they charged $3,000 or $30,000 a year. Annual fees also stifled competition as most consumers were willing to pay to carry only one card, at most.