Washington is run by schoolmarms. You can’t put that in your body! You can’t buy that with your money! You better be careful of that big bad business! What’s worse, the American people are paying for the privilege of being treated like juvenile delinquents sent to reform school to be put in line by those who know what is for your own good. There is no better illustration of this than politicians trying to dictate your personal finances with poor economics.
Legislating Socialism? Priceless
Sen. Bernie Sanders (I-VT) and Rep. Alexandria Ocasio-Cortez (D-NY) are teaming up to cap credit card interest rates and rein in supposed usurious practices. Titled the Loan Shark Prevention Act, the legislation would institute a ceiling of 15% on the rate of interest a credit card company can charge and would let states impose lower limits.
The two-time presidential candidate defended the bill, calling lenders’ interest rates “grotesque and disgusting,” adding that these businesses are taking advantage of consumers “when they are desperate and they need money to survive.” Citing a precedent from 40 years ago, Sanders alluded to the 15% limit on credit union interest rates that Congress implemented in 1980, which was raised to 21% last year.
Since the bill was proposed, the socialist millionaire has been on a Twitter rampage, lamenting Amazon issuing credit cards with 28% interest to serve the underbanked and asserting that “this kind of greed makes the poor even poorer.”
Today, the average credit card interest rate is 17.73%.
While Sanders and AOC might have good intentions, this is a perfect example of legislating from your heart and not from your head. But the American people cannot expect anything different from a freshman congresswoman who thinks it is better to be morally right than factually correct. And there lies the problem with socialists today: They genuinely believe they are ethically superior, which is the most dangerous characteristic for politicians to have, even more so than the corrupt ones who are out to earn a Federal Reserve Note and hold on to their seats for the next 30 years.
Interest in More Regulations
With this federal mandate, leftists probably feel warm and tingly inside. In their minds, they are defending a downtrodden family that lives in a basement boiler room, chewing on moldy bread scraps and relying on newspapers – The New York Times no less! – to keep warm all day. To critics, villainous lenders are imposing double-digit rates to be harsh, cruel, and malevolent for kicks.
In reality, companies attach high interest rates to their cards for economic reasons.
Whether it is Visa or Capital One, these lenders have concluded that the borrower is a high credit risk. It is true that these businesses want as many customers to borrow from them as possible; to achieve this would be to introduce lower rates to beat the competition. At the same time, these entities still need to recoup their costs, so high rates are the middle ground: grant consumer loans while still considering the high risk of default by borrowers based on criteria and assessments.
So, if AOC and Sanders have their way, this will inevitably lead to a shortage of consumer credit for high-risk borrowers. If lenders are barred from pricing their products in ways that help them recover costs, they will stop offering the service altogether, punishing the very people AOC and Sanders want to rescue from the clutches of the big bad businesses.
When people in this segment of the market are shut out from traditional options, they seek underground alternatives that might not be so reasonable.
Make Better Cents
Another mistake that the socialist duo makes is positing that these interest rates are permanent.
When you initially enter credit markets, usually when you are young, you are not given a perfect score right away. You first need to build a good rating by paying your bills on time, not exceeding your limit, and getting your spending under control. As you maintain these responsible fiscal practices, your credit improves, which then gives you access to better terms and conditions, from lower interest rates to a wide array of perks (cashback rewards, no annual fee, or travel points).
Clients can negotiate better terms and conditions. If they cannot receive better rates with their current lender, then they can research the competition and find companies that offer superior features.
Then there are those who might have gone through a rough patch years ago and are now trying to climb their way out of a hole. Some clients might have missed payments in the past because of financial troubles, but now they are much more responsible and earning a good income. Or what about current borrowers who are in the high-risk category but still pay their bills most of the time?
AOC and Sanders would punish these consumers who need credit to live in this economy.
Taking Credit for Bad Economics
Credit card companies get a bad reputation. But why?
For a few bucks a year or nothing at all, you get little plastic rectangles that contain hundreds or thousands of dollars to spend. If you repay the funds in an agreed amount of time, then you don’t get charged and you even get remunerated with rewards. However, if you fail to make a payment by the due date, then you will get charged interest and a late payment fee. Then what? You will receive harassing letters, endure annoying phone calls, and experience a suspended or canceled card. This is a far cry from serving in a debtors’ prison that AOC and Sanders would have you believe is one step away from happening in the United States.
Once again, this is a government solution to an issue between two mutually beneficial parties. It is also something that has been overblown by economically illiterate members of the press who do not understand how credit works or cannot fathom why payday loan branches or credit lenders charge interest than beyond the leftist trope of “they’re the greedy 1%!” The real answer to this issue is to treat everyone like adults, not overaged juvenile delinquents.
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