Bernie Sanders and Alexandria Ocasio-Cortez have proposed that credit card APR be capped at 15%. There is really no way you can look at such a proposal as a good thing. On its face it looks like a good idea, if you have no understanding of economics whatsoever. After all, who wouldn’t want to pay a lower APR on their credit cards? There’s a huge fault in that logic, however, and that is the assumption that the credit card company would still offer you a card if they couldn’t charge a greater than 15% APR.
Here’s the thing about credit card offers, which anyone who has ever either applied for or received a credit card should have some basic grasp of, credit card companies offer you a line of credit at a specified APR based on an evaluation of risk. There are many factors that go in to determining your APR: your credit history, credit rating, current liabilities, and annual income, just to name a few; and all of these add up to an evaluation of how risky it is to give you a line of credit. There are other factors, not related to the specific debtor being offered credit, such as the demand for credit and the supply of funds to the bank, but for our purposes here, the most important factor is risk.
Banks offer low lines of credit and high APR cards to debtors who are young, with little to no credit history, unstable income, and at the lower end of the income distribution. The low line of credit reduces the risk involved by reducing the total investment, and the high APR ensures that investors are more willing to take on that risk for a bigger pay off. Sanders, AOC, and their followers may believe that by capping APR at 15% they would be ensuring that young, lower income people accumulate less debt, but in reality what they are doing is making it so that the risk is too high, and the payoff too low, for banks to want to make that investment. So, rather than lower income households having access to low-line-of-credit, high-APR cards to use in emergencies, or to build their credit scores to a rating that might afford them better credit offers, they are cutting off entry so that only people who have already established their wealth and reliability have access to credit.
So many of Sanders’s and AOC’s policy proposals would only drive a greater wedge between lower quintile and upper quintile earners, and limit mobility between quintiles, that I often wonder if they are really as economically illiterate as they appear to be, or if they are actually evil communist masterminds fully aware of the socioeconomic divisions these policies would create. Maybe they actually hope to make lives for the poor so miserable that they see violent communist revolution as the only option.
Ultimately, regardless of the economics of the policy, the morality of it can be broken down quite simply. Suppose you have $1,000 of disposable income, and you become aware of a person who has fallen on hard times. You don’t know how reliable this person is, whether you’ll ever get your money back, or if there might be some reason you’d need that $1,000 within the next year. So you decide to give them your thousand dollars if they’ll promise to pay you back $1,260 in one year. This person thinks it over, and they really need the thousand dollars now, and believe they could easily make the $105 per month payments to get it paid off, so they accept. But here comes good ol’ uncle Bernie. He says you’re not allowed to do that unless you’ll accept only $1,150 in a year. Maybe you find these new terms acceptable, maybe you don’t, but the real issue is that you and this person had come to a mutually beneficial agreement which both of you had accepted, and Bernie decided you weren’t allowed to do that, maybe to the detriment of the person who was most in need and now may find themselves unable to resolve their financial issues.