Bernie Sanders recently referred to credit card lenders as, “loan shark hoodlums.” Not to be outdone, AOC exclaimed, “they’ll take your home!” Soon, the rest of the torch and pitchfork crowd were lining up to co-sponsor their joint bill to limit the interest rates charged on credit cards. They think fat cat bankers are getting rich on the backs of the peasants that use them.
Setting aside the theatrics, first let’s clear up the AOC statement. Yes, she does sit on the House Financial Services Committee, but apparently she doesn’t know the difference between secured and unsecured debt. No, credit card lenders cannot foreclose on your house. At best they can try to repossess last night’s dinner you charged on your card. And, that leads directly to the heart of Bernie’s loan shark reference. What the anti-Wall Street gang calls usury is not even close.
The idea behind the proposed bill is to enact a federal law limiting interest charged on credit cards at 15%. With a quick check of the facts — actual real statistics — we find the Federal Reserve Bank most recently reported that nationally in the first quarter of 2019 the average interest rate on all credit cards was 15.09%. Is 9/100ths percent too much?
True, not all credit cards charge the national average interest rate, but even when counting just those cards carrying balances and paying interest, it amounts to only 16.9% — not even two percent more than their proposed limit. And, there’s a reason for that higher rate.
Cards that carry balances also carry a higher risk of default, so the extra interest is what bankers call a “risk premium.” Last year banks charged off 8% of all credit card balances as dead losses. So, assuming 15% as the maximum legal interest rate, that leaves only 7% to cover everything else — and there’s a lot more to cover.
Aside from losses, there are plenty of other costs to running a credit card business. The cash to fund it has to come from somewhere and that means building branches, hiring tellers, installing ATM’s, advertising for customers, and paying interest on deposits. Yes, you probably don’t get paid much for your savings account, but all that brick, mortar, labor, advertising, and computer power costs banks billions of dollars a year.
And, once the cash is raised and the computers are up and running, credit card lenders have to bill, collect, and keep track of every transaction. Banks call this "servicing," and it takes even more computers and more people processing millions of accounts every month. Servicing doesn’t come cheap.
This isn’t an apology for banks, it’s a simple fact that all this stuff costs money and the Democratic Socialist crowd thinks it doesn’t.
But, one of the biggest costs to running a credit card business is fraud. You know that benefit you tell your friends about all the time? “I’m only liable for the first $50 dollars of fraudulent charges on my credit card if somebody steals it.” Well, that’s true, but it’s not a benefit, it’s the law — the Fair Credit Billing Act. Nevertheless, somebody has to pay for all of those crooks and it’s the bank. Fraud losses last year added up to about $11 billion dollars.
And finally, if you are like most credit card holders, you get some sort of reward for using your card. Maybe you get discounts, or maybe you get some cash back. My card pays me 2% on everything I charge. That benefit isn’t free, it’s paid for by the banks. True, banks charge merchants a few percent per transaction to accept credit cards, but that just covers the folks that pay their balance off every month, accrue no interest charges, and reap all the rewards.
When we add all of these numbers up — and yes, it is a bit of arithmetic — it turns out that nationally, banks make barely a 4% return on their credit card business. You can cut that roughly in half after they pay federal and state taxes, so the immoral usury that AOC and Bernie are yelling about is really just a 2% profit. Would you do all this work and take all of this risk for just 2%?
Access is what the Social Democrat crowd claims this bill is all about, but everyone does have access — just at prices adjusted relative to their risk. And, even if the rate is 20% or higher, after all the costs and risks are figured in, that’s a very fair price.
But, if upsetting the free market and setting arbitrary interest rates isn’t a bad enough idea, the bill doubles down on access by proposing letting the Post Office enter the banking business to foster competition. They can’t even deliver my mail consistently, and now I’m supposed to trust them with my finances? That would be funny if it wasn’t true.
Kevin Cochrane teaches economics and business at Colorado Mesa University in Grand Junction and is a visiting professor of economics at the University of International Relations in Beijing, China. He is a regular contributor to several national publications including the Washington Times, Washington Examiner, and American Thinker. He previously was the economic correspondent for both CBS and NBC TV affiliates in Southern California. For 27 years he formerly was a senior banking executive with a major NYSE listed bank holding company and the CEO of a national multi-bank operating company. To read more of his reports — Click Here Now.
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