Bernie Sanders, (S-VT), has proposed new legislation limiting consumer loan interest rates to 15% or less. This would include credit cards.
He proposes this law in response to news that credit card companies are raising rates on all their customers, even the ones who haven't had any late payments. I've complained about that problem on this blog, and was the target of such an interest rate increase recently.
If you didn't know me very well, you might think that I'd like this proposed bill, since I think these rate increases are a real problem. But this bill misses the mark.
What credit card borrowers need is contract enforcement, not usury laws. I didn't mind paying 17% on a credit card that I agreed to use. When my rate got increased to 23%, I closed the card and transferred my balance (to a new card with 7.4% interest). I recognize that not everyone can easily get a new card with a better rate, so if the Senate wants to enact a law, they only need to require that credit card lenders honor their original contracts and not raise interest rates unless specifically laid-out circumstances are met (like missed payments leading to penalty rates).
If creditors want to re-negotiate the original terms of a credit card agreement, they should have to close the account and get a new signed agreement from the borrower. The way it's done now, the credit card rate increases happen automatically unless the borrower objects in writing by sending snail mail to an address buried in fine print. The burden is entirely on the borrower, even when it's the creditor who wants to change the terms of the agreement.
This new national usury law wouldn't necessarily solve the problem. Yes, it would prevent my rate from going from 17% to 23%. But creditors aren't going to give 15% rate cards to people who are higher risk. That means anyone with low income or marginal credit history would be without any options for credit. Typically, the law will backfire and hurt the poor people it claims to protect. And because this bill would hurt the credtors' bottom line so deeply, it's likely that my current 7.4% rate would shoot up to the 15% allowed by law. So it's hard to see who wins if a law like this one passes. Politicians who want to woo gullible voters, I suppose.
If Senator Sanders really wants to help credit card borrowers, all he needs to do is make sure the creditors abide by their original, signed contracts. Beyond that, it should be up to us whether we want to borrow from credit card companies at usurious rates.
Thinking on this some more, the 15% rate Sanders proposes is aggressive. Currently, the average consumer credit card rate is 14.03%. That means a lot of current credit card borrowers would be priced out of borrowing at 15%.
Here's why the Senator might want to punish such a large percentage of borrowers:
http://www.coyoteblog.com/coyote_blog/2007/04/proletarianizin.html
Posted by: Jeff Michael | March 16, 2009 at 02:35 PM