Corner Attorney

I think this article makes some great points. One of the arguments with capping the rates is  that many with rates higher than 16% will be cut off and no longer be able to obtain a credit card.

That is the same argument for the constant rise in minimum wage.  More and more people aren’t worth the higher wages so they have a very hard time finding work.

The difference here is that credit card companies make most of their money from the  higher interest rates.  People with lower rates usually pay their bill on time and often in full leaving the credit card companies with no interest or finance charges.

The higher rates usually come with late fees and carried balances which is the bread and butter of the credit card companies.

Banks are also finding ways to get more fees out of their customers.  My bank pings the accounts as soon as a check is scanned or a credit card is used and if the money isn’t there, the customer is charged $25 even though the money won’t be taken out for a couple more days and the funds are there by the time the amount is requested.

The credit card and bank scenario are more examples of how companies take advantage of people with low credit scores and or low income.  Can you imagine paying $200 a month in bank fees?

The way out of this is financial discipline.  It may take some time to get back on top, but make it a goal and live frugally as long as needed.  Pay off your credit cards and don’t use them if you have a tendency to max them out.

Why Credit Card Interest Rates Won’t Be Capped

What happens if you cap credit-card interest rates at 16%? Yes, at the margin, the amount of credit extended on credit cards would fall. That’s a feature, not a bug. But would it fall dramatically? Pamela Yip quotes Odysseas Papadimitriou:

“If you cap the interest rate, it’s not like people are going to have lower interest rates than they do now,” said Odysseas Papadimitriou, chief executive and founder of Evolution Finance Inc., which operates CardHub.com. “Instead, everyone who has an interest rate below 16 percent will continue to have the same interest rate and everyone who has above 16 percent will not have access to credit any longer.”

Papadimitriou previously was senior marketing director at Capital One, so he has some insight into how card companies work.

This isn’t really true.

For one thing, credit-card companies make substantially all of their profits from people paying more than 16% interest on their cards. The rest of us generate a certain amount of cashflow in terms of interchange fees, but mainly we’re option value: so long as we have a credit card, there’s a chance that we’ll start running up large balances on it, miss a payments by a couple of days, and suddenly we’re a high-value customer.

Capping interest rates at 16% would force credit-card companies to move away from the current soak-the-poor sweatbox approach, and move instead towards a much more equitable system without bizarre cross-subsidies from the poor to the rich. Chances are that annual fees would rise and loyalty rewards would shrink — and as a result the people who pay off their cards in full every month — the people who use credit cards mainly for payments convenience, rather than because there’s a credit line attached — would start using credit cards less and debit cards more. Again, feature, not bug.    –more

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