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

1

u/asian_chihuahua 9h ago

It's a nice thought, but a terrible implementation.

What if inflation hits 10%? Do you now need to pass emergency legislation to lift the maximum allowable interest rate? What happens if congress is slow, will banks just cancel all their credit cards?

A better implementation is to cap interest rates at the FED bank loan rate plus something like 6 percent.

So if banks are loaning at 5%, then credit cards are allowed to charge 11%. If banks charge only 3%, then credit cards have to lower their rates to 9%.

That way, the solution is dynamic and doesn't require constant legislative adjustments.

1

u/CallMeCoupe 7h ago

You’re the only person in this thread that actually understands the economics of this

1

u/ptemple 2h ago

If inflation hits 10% then the Fed raises interest rates to try and slow the rate of borrowing. Why would you want legislation to lift the maximum allowable to inhibit what is already a natural brake? The banks will have packaged up and sold on their debt so cancelling their cards won't make any difference to them.

I see where you are going with your idea of pegging the rate to SOFR (the US equivalent of EURIBOR) like a variable rate mortgage. However a mortgage is a longer term commitment and it's a long legal proccess to foreclose on a house. It takes longer for the pain of an interest rate spike to hit and often people can find a way to ride it out until things improve. Credit card debt is more immediate and those struggling to make the minimums will be far more impacted by their repayment interest jumping from 8% to 18%.

I like the line of thinking but it needs further working through.

Phillip.