Sometimes, bipartisanship is a wonderful encounter in the heart. It is also a mental encounter that does not understand economics. The latter is Recently proposed law It was introduced by Rep. Anna Paulina Luna (R-FLA.) and her surely erroneous counterpart, Alexandria Ocasio-Cortez (DN.Y.) to limit credit card interest rates.
Let's start with commonalities. Most people agree to the interest rate on their credit cards. Over 20% averageit's excessive. No one should pay 20% or 30% interest per year unless they face a real emergency. Still, the debt should be repaid as soon as possible.
Policies that seem good in theory often fail in practice, with credit card interest rates being one of them.
Prices act as signals and provide important information to consumers. High interest rates require you to send a clear message. Avoid carrying your credit card balance. I'll pay the full amount Prevents excessive interest burden each month.
But the typical method ignores lawmakers who place more political appeal than economic literacy. Unintended consequences of their policy. Proposing an interest rate cap disrupts this pricing signal and creates a cascade of negative effects.
The most pressing outcome is reduced access to credits. High credit card interest rates exist as lenders take charge of default risk, including the possibility that lenders can be able to release their debts through bankruptcy. To compensate for this risk, lenders adjust costs accordingly.
While limiting credit card interest rates while maintaining bankruptcy, lenders force them to adjust their underwriting process. As a result, many borrowers, including those with inadequate credit or with decent credit, will lose or deny access to credit from traditional sources. To compensate for lost revenue, lenders will introduce additional fees and make borrowing more expensive in other ways.
As expected, lawmakers like Luna and Ocasio-Cortez will complain about financial discrimination against low-income borrowers who are suddenly trapped in by the credit system.
Without traditional access to credit, many of these individuals rely on riskier, more expensive alternatives, such as payday lenders and sources in the black market, exacerbating the issues policymakers claim to be resolved.
Ultimately, Congress cannot legislate unintended consequences. In fact, Congress is usually a source of unintended consequences.
While some may argue that restricting credit access is beneficial to certain individuals, denial of access does not mean that people do not seek credit elsewhere.
More importantly, what empowers governments to regulate financial liability? Should Congress also prevent people from buying cars they can't afford, placing sports bets, buying designer clothes, and enjoying steak dinners?
Financial liability cannot be legislated, especially in countries with minimal financial literacy education.
And don't forget that Congress itself has accumulated $36.5 trillion in national debt. There are few role models for financial responsibility.
Policies that seem good in theory often fail in practice, with credit card interest rates being one of them. Instead of creating more economic hurdles, Congress should focus on fixing its own financial mismanagement and addressing the issue of affordability. People should not be forced to rent at an insane fee just to achieve their goals.
