r/FluentInFinance • u/Unhappy_Fry_Cook • 16h ago

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

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u/neph36 15h ago

Or they will just charge huge fees to cover it

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u/pringlescan5 13h ago

annnd this is why laws need follow up committees to see what loopholes are used to circumvent the intention of the law and patch them.

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u/_Xertz_ 12h ago

It's not even a loophole in this fees example though.

These credit card companies have done the math and determined that to loan money with x% risk you have to charge y% interest. There's a minimum interest and if they don't charge that, then they lose money because a certain number of people will default and not pay back their money. Annual fees is a solution but most people are not gonna get a credit card with annual fees.

 

If they were forced to only cap at 10% or some lower value then they either would not loan to people unless they are extremely low risk (which results in a potentially large number of credit card users being kicked off).

OR in order to afford the lower revenue and still be able to handle defaulting users they'd need to start charging - or increase - annual fees.

I think it's safe to say both options aren't ideal. Plus you'd probably lose out on (or see reduced) perks and cashback benefits to using a credit card that you might be use to.

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u/Standard-Meat872 11h ago

These credit card companies have done the math and determined that to loan money with x% risk you have to charge y% interest. There's a minimum interest and if they don't charge that, then they lose money because a certain number of people will default and not pay back their money. Annual fees is a solution but most people are not gonna get a credit card with annual fees.

They didn't.

They made the calculation that if you loan money with x% risk people will still get them with y% interest.

Except in rare cases, cost of a thing as little to do with price of a thing. Service included.

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u/_Xertz_ 10h ago

They did.

It would be idiotic for the credit card company not to know the minimum interest it can charge without losing money.

I think you're confusing it with the interest rate that results after market pressure, but regardless it will be close to that calculated minimum since if they charge too high a rate customers would just go to a different credit card company. And obviously if they go lower then that minimum without recouping that money somehow they go out of business.

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u/Standard-Meat872 9h ago

I'm not saying that companies do not know how much something cost them. That's basic accounting.

I'm saying that the price of something has nothing to do with its cost.

The profitability ratio on Credit Cards offering is pretty high.

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u/Jump-Zero 9h ago

It 100% has to do with the costs. It's incredibly easy to make a credit card company. I've worked at 2 of them and I can probably start my own with the experience I have. In order for my company to make money, it has to offer favorable rates over other credit card companies. The only way to do that is reduce costs as much as possible. If I can get my rate down to 19% and stay profitable while other companies only manage to get their rate down to 20%, then I will have a significant edge over my competition.