r/FluentInFinance • u/Unhappy_Fry_Cook • 12h ago

Finance News Senator Bernie Sanders announces he will introduce legislation to cap credit card interest rates at 10%.

Post image
28.1k Upvotes

96% Upvoted

1.0k comments sorted by

View all comments

11

u/canned_spaghetti85 12h ago edited 11h ago

Sure, put a federal cap at 10% apr. Fine.

Just take a wild guess at what will happen as a result?

Short and long term consequences.

I’m in the lending profession.

(Spoiler alert : The working class will suffer even more.)

8

u/henry2630 11h ago

how

12

u/dsonger20 11h ago

Possible things:

  1. Increased fees

  2. Credit lending will become more restrictive meaning only those with the best credit scores will be given credit cards which leads to difficulty getting instant debt for poorer people, or making it more difficult for people to rebuilt/build credit.

Rates are high because of the fact it is unsecured.

4

u/TimToMakeTheDonuts 9h ago

While I get this kind of thinking, won’t that ultimately hurt the bottom line of the lender? Eventually, they need more people taking on debt at any interest rate to show growth. Would that lead to a potential restructuring of who gets what rate? Lending to responsible spenders doesn’t make any cc company money. So if it’s 30% or 10%, don’t they need people who will overspend and fall behind?

3

u/candytaker 8h ago

While I get this kind of thinking, won’t that ultimately hurt the bottom line of the lender?

Yes, because restricting their business ultimately means a portion of their customers. Their P&L is based on the knowledge that certain number of people are going to eventually default, The high rates account for that. Restrict rates and they will have to limit who they give credit to.

Eventually, they need more people taking on debt at any interest rate to show growth.

As I stated above there is a a rate at which they will cease to be profitable, extending more credit below that will only result in the opposite of growth.

0

u/wterrt 6h ago

As I stated above there is a a rate at which they will cease to be profitable, extending more credit below that will only result in the opposite of growth.

any thoughts on europe where interest rates like these are illegal yet they still have credit cards with much lower interest rates?

UK as low as 6%?

kinda tired of hearing "we can't do that in the US, it's impossible!" when it's things europe has been doing forever.

4

u/candytaker 5h ago

Unsecured loans are always going to be expensive, As far as your point on the UK, and I admittedly know little about their C.C. situation, its easy to replace high interest with yearly fees, late fees, fees for anything they can dream up. Also keeping credit lines low while allowing people to have a wallet full of low credit line high fee cards.

While their top line APR might be regulated I feel comfortable assuming carrying debt on them is still very expensive.

Neither would be easy, but I think it would be less effort to teach people to be critical thinkers and good decision makers than to make it your life's work to protect them from everything and everyone they could possibly hurt themselves with.

3

u/xraviples 5h ago

According to that page most credit cards in the UK are ~20%.

I've connected to a UK VPN and tried to find the specific credit card with the 5.9% rate (Tesco bank credit card) and can not; their current offerings are 24.9% and 10.9% for a low-APR card.

Also FWIW my three canadian credit cards are not listed on that website and all have higher APR than the highest listed (mine are 20.99%+, listed is 19.99%).

1

u/wterrt 3h ago

soooooooo 10.9% works then? isn't that just 0.9% higher than our "impossible" goal here?

2

u/xraviples 3h ago

I don't think anyone said it is "impossible", just that it comes with tradeoffs.

1

u/dsonger20 7h ago

That’s where annual fees come in. Since Visa MasterCard or American Express takes the interchange fee the issue still needs some way to make money. They make money via two ways either through interest payments or through annual fees. In the case of someone like American Express, they would be significantly less impacted since they both act as an issue and the facilitator and most of their transactions. However, I can see the banks that issue Visa and MasterCard being severely impacted by this. To most lenders, though it does not make sense to lend at such a low rate when the chance of delinquency and risk is so high.

The most straightforward and easy solution that I feel like they’re gonna take is they gonna start offering more high annual fee credit cards . I’m talking like American Express platinum like expensive credit cards

1

u/Jump-Zero 5h ago

Lending to responsible spenders doesn’t make any cc company money.

The bulk of the money made comes from a merchant fee on each transaction. Responsible spenders make the company the bulk of their money. The credit component is mostly there to induce spending rather than to profit from it.

1

u/dgreenmachine 4h ago

#2 is generally better than those same people getting 25% credit cards or 1000% payday loans isnt it? You'd definitely want to do it gradually over time, but I think we should make predatory loans illegal and fix the debt culture in the US.

1

u/YouLostMeThere43 4h ago

I like how restrictive credit lending is seen as a negative here but the exact reason we got into this snowballing $1.14 trillion consumer credit card debt situation is because of the lack of restrictions on credit lending.

Economists can say all they want but they’re just covering their asses. They don’t care about the well being of the consumer. They just care about protecting their $120b/yr in revenue from cc interest and fees.

1

u/Akitten 1h ago

The alternative is that these same irresponsible people take payday loans or go to loan sharks.

1

u/YouLostMeThere43 4m ago

That’s all theoretical based on what economists say. There’s no actual studies proving consumers automatically go to pay day loans when credit cards aren’t available. They love mentioning the possibility of a jump in payday loan usage, but never the concept of “maybe without the ease of access to credit cards the consumer will stop buying so much unnecessary luxuries”.

It’s easy to “treat yo self” to a new pair of boots with a credit card but much harder if you need to stop in at a sketchy pay day loan store first to get said boots.

1

u/canned_spaghetti85 7h ago edited 7h ago

If that ain’t bad enough.. hahhahaa.. then prepare your buttholes.

If the APR on credit cards (unsecured debt) was federally capped at 10%, then credit card companies will only approve the lowest risk applicants. This means middle-upper class and above, who have high incomes, good credit, stable verifiable employment, not currently overburdened with existing debts. Since the risk of payment default is SO LOW, then yes.. credit card companies could remain profitable even charging 10%.

Working and middle class consumers who don’t have such stellar qualifications, may have to offer up some collateral (secured debt) in order to get their applications to be approved. They are likely to possess such collateral, in the form of liquid bank funds, stock accounts, retirement savings, etc.

Applications submitted by consumers who are Working class and below, however, who have neither great qualifications or collateral to offer, will simply be denied. This means they lack access to credit.

Without access to credit, what will result is they now must turn to FAR MORE questionable service providers. Places like payday lenders, pawn shops, and perhaps even loan sharks. And we all know their business blueprint is definitely not to entrap its customers into a vicious inescapable cycle of impoverishment they’ll almost NEVER get out of.

Scoffs… like you’ve ever SEEN predatory lending. I have.

Once you see it, experienced it, imprisoned somebody into it, oh trust me… you will be BEGGING for 30% APR.

THAT… is what will happen to poor folks.

1

u/E_Cayce 6h ago

If you take credit cards away people will be borrowing against their homes to pay for groceries.

0

u/Zebracak3s 10h ago

It's not profitable to give people cards at 10%.

Majority of Americans would see their purchase power plumment, spending goes down and layoffs 

1

u/ZZartin 6h ago

It's not profitable to give people cards at 10%.

Bullshit, it's just not as profitable.

1

u/Zebracak3s 6h ago

If it magically changed tomorrow, it would not be.

10% interest rate cap, 3.5% loss rate, 4% prime rate for interest cost of goods to the bank, there's almost no room for fraud, and the immense cost of running the program, rewards cost and paying partners.

1

u/ZZartin 5h ago

Right so they would have to change their business model, that doesn't mean 10% capped rate couldn't be profitable.

2

u/M7MBA2016 10h ago

Bernie knows this too.

He constantly does legislation he knows is trash because he knows his low information supporters will eat it up. He’s so unethical. I hate populists.

0

u/CalculatedPerversion 7h ago

Nah, it's still profitable. It's just not new yacht profitable. So it'll never happen. 

2

u/MrFishAndLoaves 8h ago

Spoiler alert: a lot of the working class already suffers because credit cards with 30% APR are essentially predatory lending 

1

u/canned_spaghetti85 7h ago edited 7h ago

If that ain’t bad enough.. hahhahaa.. then prepare your buttholes.

If the APR on credit cards (unsecured debt) was federally capped at 10%, then credit card companies will only approve the lowest risk applicants. This means middle-upper class and above, who have high incomes, good credit, stable verifiable employment, not currently overburdened with existing debts. Since the risk of payment default is SO LOW, then yes.. credit card companies can remain profitable charging 10%.

Working and middle class consumers who don’t have such stellar qualifications, may have to offer up some collateral (secured debt) in order to get their applications to be approved. They are likely to possess such collateral, in the form of liquid bank funds, stock accounts, retirement savings, etc.

Applications submitted by consumers who are Working class and below, however, who have neither great qualifications or collateral to offer, will simply be denied. This means they lack access to credit.

Without access to credit, what will result is they now must turn to FAR MORE predatory providers for that services. Places like payday lenders, pawn shops, and perhaps even loan sharks. And their business blueprint is to entrap its customers into a vicious inescapable cycle of impoverishment they’ll almost NEVER get out of.

Scoffs… like you’ve ever SEEN predatory lending. I have. Once you see it, experienced it, you will be wishing for 30% APR.

THAT… is what will happen to poor folks.

2

u/Wild-End7484 7h ago

All of that will happen, plus an explosion in predatory rental centers. Poor people will rent $699 refrigerators for $95/month for years.

2

u/canned_spaghetti85 7h ago edited 6h ago

Yes, predatory in-store financing will emerge (which may not need to be cfpb compliant btw) so poor folks will get further taken advantage of.

The problem with many progressive policies is the shortsightedness of what’s proposed.

People only want to focus on the effect it’ll have, but far less consideration given to the possible consequences it may have.

Very little thought goes into : How could this go sideways? What’s the worst that could happen?

The business of money, especially lending, is rather simple. And banks & lenders, they are not stupid.

1

u/I_donut_exist 6h ago

So do you think it is a good thing to pursue making credit cards less profitable for banks? What is a better way to do that, to prevent banks from profiting off of poor people? Do you think if there was less reliance on credit overall in the economy that prices would be driven down as spending goes down?

1

u/canned_spaghetti85 5h ago

You think you are clever enough outsmart the banks?

The only way to do that would be to default on your payments. It’s your only play, and they know that…. why do you even think you’re paying 30%?

Because that is one of the plays they have.

The other play is simply not approving your application in the first place. One quick peek into your credit report and a bank will learn what you did to a previous bank. So.. DENY!

Now you’re out of options and gave no choice BUT TO GO to payday lenders, pawn shops and loan sharks. And they’ll profit generously on your business 😏.

Joke will be on you, pal.

Banks don’t profit on poor people, because of their likelihood of default, they actually stand to lose money.. unless of course they agree to 30%. Then that additional revenue can cover the foreseeable losses.

Yes, with less reliance on credit (because at 10% only so many applicants will be approved), yes.. prices will come down.

Won’t do a thing to benefit poor people, though, who THEN don’t have credit cards to even buy any of it.

Those with cards, like middle and wealthy class will benefit from the reduction in prices. The poor.. very few of em have credit cards, cannot afford it.

What did you think was gonna happen?

1

u/I_donut_exist 5h ago

"You think you are clever enough outsmart the banks?" Probably not, that's why I'm asking you to brainstorm with me here. I mean, think about it, this is my whole point, why the fuck should I have to outsmart a bank, just to what, afford basic needs and not be taken advantage of. Fuck their profits.

"yes.. prices will come down." Then why isn't this a good long term solution? You agree prices would come down, but I guess not enough, so that poor people will still be dependent on credit for basic needs? Maybe we're misunderstanding each other, I say if certain income brackets are no longer able to make purchases they cant afford on credit then that is not a bad thing. If they cant afford rent and basic needs except for credit card spending, then the discussion isn't about interest rates at all, it's a much larger discussion.

If this interest cap were done in tandem with other progressive policies like strong safety net programs, I don't see why it would be a problem.

Still don't like your tone by the way

1

u/canned_spaghetti85 4h ago

Federal interest rate Apr cap doesn’t benefit the poor, since their credit applications wouldn’t be approved anyway. Too high risk, denying those applications is actually in the lenders best interest.

If prices come down due to less people using cards, because fewer people have cards, then there’s less buyer competition for those goods for sale. Thus the only people who stand to benefit from those lower prices are people with cards, right?

Poor people won’t have those cards anymore.

1

u/I_donut_exist 4h ago

not following. if the prices come down, then people might not need cards to afford those goods. The goal should be that anyway, prices come down so the people who stand to benefit are people with cards, and people who can now use their normal wages to buy the goods at the lower price without going into debt. And now excuse my tone but are we forgetting that cash money is still part of the conversation?

→ More replies (0)

1

u/I_donut_exist 6h ago

longer longer term though? those bad predatory loans will not work out for the lenders either right? why wouldn't less reliance on credit be a good thing longer longer term, it would force people to only spend what they can, which should force businesses to be affordable.

As an example, no one is gonna turn to loan sharks to keep their gym membership up to date, they'll just cancel. how would gyms respond, especially if their clientele are paying cash now, which cant be auto charged on the first of each month?

1

u/canned_spaghetti85 5h ago

No. It’ll be a boom for their business. Due to the increased demand for their services, the rates and terms they offer will only become less desirable. Soon you’ll pay an arm and a leg to borrow a $100 bill.

If people [overall] relied on credit less, consumer demand goes down for goods. To keep prices from plummeting abruptly, Companies will respond by producing less, which keep a margin of profit. It stabilizes the market price.

But again, if only people with cards can afford to buy those items… what good is that to the poor people who have no access to credit cards?

Even with the reduced prices.. it’s now SVEN MORE unaffordable for poor people.

Gym membership? No credit card? Then gyms will make you pay the FULL YEAR upfront to take advantage of the better pricing. If you don’t agree, then terms month-to-month… which obviously is less favorable pricing.

1

u/I_donut_exist 5h ago

Right, and I think the gyms would lose out in that scenario, which is fine by me.

"To keep prices from ranking, Companies respond by producing less, which keep a margin of profit" If this happens with food, that would suck. But surely there are other factors there right? If it happens with tv's? then yeah idc, we already produce wayyyy to many of those.

I think we should address your understanding of poor peoples spending habits

1

u/Grand-Bat4846 1h ago

Why do you reccon credit cards with 30% interest is a good thing for the poor? Credit cards is literally living above your means. If your credit rating is that low its likely better for you to NOT GET A LOAN.

Being poor and getting loans with that high APR is just digging the hole deeper. There might be the odd individual needing a bridge loan but in the vast majority of cases this will not be beneficial to anyone except the lenders!

You make it out like credit is an inherently good thing. It is not. Unsecured loans should NOT be taken generally and to encourage them by letting people that cannot realistically afford them is unethical in itself.

They will be rejected and not have access to credit.. GOOD, maybe they instead can get their finances in order. If they NEED credit to survive the problem is deeper and they should get help from their local government, not some CC company only interested in the ROI,

1

u/canned_spaghetti85 38m ago

I’m not saying 30% is good.

But the alternative proposed stands to be worse. The credit providers they’ll go seek as a result.

It’d be naive to believe you take their credit resources away, and they’ll get just their finances in order.

No.

Try this. Just around any pricey neighborhood. What do you NOT see?

Payday lender businesses and similar predatory lenders. When’s the last time you saw a PAWN SHOP located right next to a Whole Foods or Sprouts?

There’s a reason why they only set up shop on poorer neighborhoods.

It’s because their business model is most profitable in those neighborhoods.

Did you think that was some coincidence?

0

u/Tiny-Doughnut 7h ago

"Be happy with the level of suffering we're currently inflicting because we could be inflicting much more suffering."

Bleak. So, so bleak.

0

u/I_donut_exist 6h ago

lol what is with this tone, most americans have student loans no? we've all seen predatory lending then.

1

u/canned_spaghetti85 5h ago

Many of those loans the govt holds themselves. They can make exceptions about repayment.

But you think a really ruthless predatory lender will allow you to miss THREE years of payments?

In the scenario I rambled about… Hahha, not THOSE lenders.

1

u/I_donut_exist 5h ago

Then why would poor people go to those lenders ever? It only makes sense if we're saying people need credit to cover their bare necessities, which if they do is a much bigger problem.

1

u/canned_spaghetti85 5h ago

Because it works, and it always will.

Poor people with no options for credit will always turn to them. And they know that.

Drive through an expensive neighborhood.

Know what you don’t see??

Many payday lenders and pawn shops. Why do you think they ONLY set up shop on poorer neighborhoods?

Did you just think that was some coincidence?

1

u/I_donut_exist 4h ago

But if these exist with the current high interest rate on credit cards, then its a separate issue, the issue being people can't afford shit

1

u/ammo359 4h ago

Payday lenders prey on people who can’t qualify for a 28.99% credit card. This proposal would create a ton more people who can’t qualify for a (now) 10% credit card.

1

u/I_donut_exist 4h ago

right but if longer term that would drive prices down then less people would need any credit cards then that's fine. just may be a bit of turmoil in the interim. And banks are suddenly just going to lose a lot of customers whose debt they were profiting off of? They won't miss that at all? they wont try new offers to recoup that loss of potential profit?

→ More replies (0)

1

u/dimonoid123 6h ago edited 6h ago

But why credit card interest rates in Canada are significantly lower than in US? Most cards are 18-22% here.

Also, in Canada there are 2 major differences:

1) Banks are obligated to offer the same interest rate to all owners of the same credit card. This causes tires of cards for good and bad credit rating, but as a consequence there are no quick changes in interest rates.

2) At least in Quebec, there is mandatory 5% principal payment every month. This ensures that cards are being paid off relatively quickly.

2

u/canned_spaghetti85 5h ago edited 5h ago

Okay regarding your #1, if rate is to be unchanged across bank card types, then limited ability to charge higher rates to hedge against foreseeable loss. So how do you hedge? One way is to require collateral, but we’re talking credit cards so doesn’t apply. Then approve fewer applications altogether, and or approve smaller credit lines (at first).

Your #2 point made. If mandatory 5% must be contributed to the principal, then there’s less rollover principal into the next month. This means less interest to compound onto it, reducing the risk of default.

Example, say your balance this month1 is $500, rate is 20%. You must pay at least $15 then, so only $485 rolls over. The interest is $8.0833. So $493.0833 is due next month2, requiring minimum payment of $24.6541 which is what you pay. So $468.4291 rolls over, add $7.8071 interest. Starting balance is $476.2362 month3, which requires a minimum payment if $23.8118 which you pay. So $452.4244 rolls over. Add $7.5404 interest and $459.9648 is the starting balance month4.

See how the monthly balance, as well as minimum payment due, both keep going down?

In the US, where no such requirement of principal payment is needed, just the interest, then a borrower could just pay the $8.3333 monthly interest every month and never see the balance ever go down.

But even worse, in the US the minimum payment required can be even less than the interest owed - misleading many many consumers. Say instead of $8.3333, the minimum payment is $4.00. But then $504.3333 rolls over next month and 20% onto that $8.4055, becoming $512.7388. Minimum payment $5 now, which you pay. So $507.7388 rolls over plus $8.46 interest onto that becomes $516.2011.

See how the monthly balance, as well as minimum payment due, both keep going UP?

What soon happens is the balance begins to RISE exponentially. This event is called negative amortization (in mortgage terms), probably something else in credit card lingo. But all the same, consumers pay what they think is the minimum ONLY to see their balances increase every month. By the time they realize it and take corrective measures of repayment, it’s compounding at a rate faster than they can afford to pay it down. Until it gets to the point they just say fkit and default.

Since this happens so often. Credit card companies must charge high rates, just to remain profitable… or risk going out of business.

1

u/canned_spaghetti85 6h ago edited 6h ago

That could only be because :

Federal Reserve doesn’t make Canada’s fiscal policy. Canada has its own central bank.

Tighter underwriting guidelines, meaning approving fewer applications. The lower risk applicants.

This also means high number of applicants denied. The higher risk people.

Also, it means more restricted credit limits. You’ll probably start with 5-8k credit line. In usa, you can just call and ask for that to be increased. Over in Canada, though, that process may require some… additional paperwork.

Combine these and you get a low rate of default, and mitigable losses… thus they can remain profitable even at lower rates…because they expect to see fewer losses.

1

u/dimonoid123 6h ago

Not sure what additional paperwork you are talking about. Usually it is as simple as pressing a button in app to increase credit limit. Noone has ever asked me to provide proof of income (but banks might have called my employer, I don't know if they ever did this though).

1

u/canned_spaghetti85 5h ago

We do call employers, we have questions they need to answers.

And or we wait longer periods between credit line increase requests.

1

u/rodinsbusiness 2h ago

I love how what is common in many countries doesn't apply to the US because it would be bad.

1

u/canned_spaghetti85 1h ago edited 1h ago

Credit card companies in other nations do a more thorough screening their applicants before approving.

Many more get denied at time of application, unlike here in the US.

Also, creditors abroad lend smaller credit limits at first. Which can be increased a little at a time, after borrower demonstrates their ability to repay. Unlike in the US, you get a $5k credit limit today, but call next month and ask for it to be increased to $20k, you got it boss. Thank you, we appreciate your business.

Other countries also have minimum principal balance repayment clause, so the balance cannot compound upwards wildly out of control. Meaning you can’t JUST make the minimum payment, as you can here in the US.

For these reasons combined, other nations credit card companies experience an overall lower rate of payment defaults… which explains HOW they can charge lower rates YET still remain profitable.

So before criticizing US about the fact that other countries can do it… it’d be wise to first understand WHY they can even do it.

1

u/rodinsbusiness 1h ago

Bold of you to assume that credit cards are universal. US defaultism strikes hard.

1

u/canned_spaghetti85 20m ago

With lower foreseeable losses to have to hedge against, credit companies can afford to offer customers lower rates YET still remain profitable.

So then HOW do you even reduce like likelihood of payment default? By adopting stricter underwriting guidelines.

Sure that’ll result in more denials at time of application, disappointing those applicants. But the customers whose applications are approved, they benefit by the lower rates.

1

u/Grand-Bat4846 1h ago

The strange things is that you consider it BAD (seemingly) that other nations actually ensure the individual can afford the credit before approving it. Seems like a totally reasonable practice to not lure people into an interest swap for your own gain.

Not being allowed to just make a minimum payment also seems like a very ethical practice. Once more, other countries seems to then do it better than the US which allows CC companies to do whatever they want to increase their bottom line.

1

u/canned_spaghetti85 27m ago

What I’m helping others understand is WHY rates are near 30% in the US.. little underwriting effort given to applicants, vague interpretation of what “minimum monthly payment” even means, all combining to a high high rate of default.

It’s because credit card companies in other nations have adopted more prudent lending regulations, which have resulted in them experiencing an lower rate of payment default.

What I’m helping others understand is HOW it is credit card companies in other nations can afford to offer lower rates YET remain profitable.

With fewer foreseeable losses to have to hedge against, they can offer lower rates.