A Modest Proposal (and unintended consequences . . . perhaps)

June 17, 2019

I posted on Facebook post last month about a proposed bill from Bernie Sanders and Alexandria Ocasio-Cortez about controlling credit card interest rates.

The post generated a lot of views, clicks, and shares along with some comments in response to my opinion that it will never pass.

A few of those comments were purely political.

Others sounded like they came from people who live in a country where a significant percentage of households have maxed out credit cards and are barely paying the interest and fees, never mind paying down the actual debt. People, in other words, who can’t help but notice they’re paying 21%+ interest at a time of historically low rates on other credit products like mortgages. Sound at all familiar?

Two comments, however, were about the unintended consequences of enforcing a nationwide 15% cap on credit cards which would, in essence, bring us back to the 1970s.

Here’s the history first. Before 1978 (I know, a million years ago, but bear with me for a moment) banks issued credit cards in the state they were chartered in (anyone remember Mechanics Savings Bank and CBT?) and, of course, needed to abide by the interest rate rules of that state.

So if you lived in Windsor and wanted a credit card, you went to your local bank, put in an application, probably talked to the manger who was also probably a neighbor, and you waited a couple of weeks or more to be approved. The bank was careful about who it approved for credit.

The highest interest rate the bank could charge under Connecticut Law at the time was 12%. In the 70s, only 38% of American households had at least one credit card.

Then came 1978 and the Supreme Court of the United States heard a case that changed it all. Most people would say it is one of the most boring cases in Supreme Court history. But the effects of the decision are fascinating and changed everything. One bank from Nebraska was deluging Minnesota residents with sales flyers offering credit cards with NO FEES! And they also seemed to approve everybody for an account.

Another bank, a stolid Minnesota institution, also offered credit cards but was bound by the state’s interest rate law and could only charge customers 9% interest. They charged a yearly fee to help offset the low interest rate.

The first bank was chartered in Nebraska, a state with very lax interest rate rules. They charged no fees but they made up for it with 18% interest rates and higher. Because they could charge so much more in interest, they could accept the risk of giving cards to people with so-so credit.

The stolid Minnesota bank maintained that all this was unfair competition and, besides, banks that did any kind of business in Minnesota needed to follow the interest rate law of the state.

The Supreme Court bought none of it. They ruled 9-0 in favor of Nebraska. Judge Thurgood Marshall stated that the Minnesota bank “did not have a legal problem but they did have a marketing problem.”

Banks now only needed to abide by the interest rate law of the state they were chartered in, not where their customers resided. You can thank the Supreme Court for all the junk mail you get from South Dakota, Nevada, and Delaware.

Ten years after the ruling, 56% of households in the U.S. had at least one credit card.

Today it is up to 75%.

The more credit cards out there, the more credit card debt. Add in the astronomical fees and high interest, and you are increasingly unable to keep balances down. Already almost half of all Americans don’t have a at least $400 on hand for emergencies. More and more people are accepting those offers from South Dakota, Nevada and Delaware but just to pay off the credit card balances they already have.

A cap at 15% interest just might help people get the balances down, get things under control – certainly a better shot at it than at 25.6%, $35 fees, over-limit or late fees, and more.

One commenter on the Facebook post pointed out (cynically or wisely, you decide), (a) the banks would adapt and substitute higher fees for the loss on the interest side, and (b) people with no credit, people with bad credit, people trying to rebuild their credit, would no longer be able to get credit cards.

The concern is people will “lose” credit – in my book I talk about a client who had his credit lines slashed by his bank. All of a sudden the guy who thought he had a few thousand dollars in available credit for a rainy day had none. This happened to a lot of people after the economy crashed in 2008—the credit card companies just didn’t have the money to lend anymore, or, they knew as people lost jobs they would rely on credit so the companies cut a bunch of us off before we could get deeper in the hole.

Put another kind of control on the credit card companies and I can see them tightening the belt again. If their business models work only if they can charge $35 for each fee and over 21% annual interest, they will definitely pull back if limits are placed.

The thing is, I’d much prefer bank customers getting it together and planning a way out from the debt. That’s the way you deal with it. A cap is well-intentioned but, really, who doesn’t think the banks will find all manner of ways around it?

It’d be like the government dictating that Lucy had to hold the ball for Charlie Brown from here on out. She’d agree, smile, and wink because she knows they didn’t tell her how to hold it, and there’s a dozen different ways of doing that while still insuring poor ol’ Charlie never kicks a field goal.

The federal government doesn’t need to pass a law for you to start handling and managing your debt better. You don’t need me to tell you what to do—you know you should have a savings account, you know you shouldn’t live “beyond your means.”

The issue is whether you WILL ever do it, whether you will ever cut out credit card use, have a plan for future purchases, increase your income so you can live the way you want without pawning away your future.

I have some great tools for you to get started. Let me know when you’re ready.

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