May 12, 2019

How to stop credit card interest rates from rising

The average interest rate on credit cards is higher than 15% for the first time since 2001, according to the Federal Reserve. If you just look at cards carrying a balance, the rate is almost 17%. And the average interest rate on retail cards is more than 25%.

Source: Federal Reserve via FactSet; Chart: Axios Visuals 
Source: Federal Reserve via FactSet; Chart: Axios Visuals 

Driving the news: Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez have introduced a bill that would cap credit card interest rates at 15%.

The big picture: Credit cards are a particularly insidious form of credit, often filled with what Elizabeth Warren calls "tricks and traps." By bundling a loan with a very convenient payments device, banks deliberately make it easy to rack up large debts and interest charges. Capping rates at 15% would significantly reduce unintentional consumer indebtedness.

  • Capping credit card interest rates would force banks to start unbundling their lending activities from their payment-card services.

My thought bubble: It's fine for lenders like Affirm to charge simple interest rates higher than 15% when borrowers are deliberately borrowing a specific amount for a specific purpose. Consumer credit is a public good — but loans should be entered into intentionally.

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