Price controls often lead to black markets. Labor paid under the table to avoid minimum wages, or people converting their garage into an off-the-books apartment to avoid rent controls are common examples. Loans from family and friends sound like a nice alternative to credit cards. I think people are more likely to use payday lenders which also charge high interest rates for unsecured loans. Beyond that, credit markets for borrowers who need instant credit are likely to shift underground, exposing borrowers to usury. Of course, another possibility is that lenders develop an entirely new product that does the same thing as credit cards, but circumvents credit card regulation. In markets, as in Jurassic Park, life finds a way.
I agree that payday lenders are probably the main fallback, which is a much worse outcome for people who need access to credit. I hesitated to call it a “black market,” but friends-and-family loans could absolutely function that way if they’re charging more than the cap.
Why do they keep proposing plans that go against basic level economic principles? My AP kids spotted the effects of a price ceiling right away when they first heard about it. Same with all the tariffs.
It’s tempting to say politicians clearly haven’t studied economics, but that’s not always true. AOC was an economics major!
A few economists have pegged this sort of belief in unsupported policies as “this time is different” syndrome. That seems like the most likely explanation.
Degree or otherwise, AOC clearly doesn't understand economics. If she did, as the old saw goes, she wouldn't be a socialist. You can't tell me *every* student who passes your econ class actually understands it and how it applies to the real world.
Almost all politicians eschew sound economic policy, because if they're unshackled by the laws of economics, there's no limit to what they can promise their constituents.
"It is difficult to get a man to understand something, when his salary depends on his not understanding it." -- Upton Sinclair
"Capitalism has worked out brilliantly for the American working class."
I assume you're being sarcastic, but it is actually true. Even being part of the bottom 20% of earners today is better than being part of the bottom 20% of earners 100 years ago.
This analysis gets to the heart of the credit access problem. The borrowers most harmed by a well-intentioned cap are those at the margin - in consumer credit, that's individuals; in business credit, it's small and medium enterprises (SMEs). When banks can't price for risk, they don't lend to 'riskier' SMEs, pushing them toward expensive, opaque alternative lenders. Protecting access requires acknowledging risk, not legislating it away.
I always try to focus the article on personal experiences, but SMEs are a great example of another group impacted by this. Thank you for adding that insight.
This was a very interesting article from someone who is learning more about the credit space. This article was eye opening to the invisible consequences that banks and consumers are vulnerable to from the rate drop. Since banks are the ones approving credit cards they will reduce credit limits, deny credit applications, or make it even more competitive to get cards. It is going to be fascinating to see how credit card companies are affected. Will people be spending more because the rate is lower or will spending decrease from the reduced amount of credit approved. It will also be interesting to see how rewards and perks will be changed by issuers to help incentivize spending.
Given your experience in the space, what do you anticipate? I'd be curious to hear how credit card companies are internally talking about these types of policies.
I am not sure how credit card companies are internally talking about these polices and there has been no public statement about the rate changes from either company. I anticipate a cautious approach with incentives to continue high spending. After watching both stocks drop since the announcement, it seems that investors have concerns about a potential decrease in profitability from this or from the changes in cross-broader spending.
There's a really interesting issue here in that the people who can get lower rates likely aren't carrying a balance, so they don't care about the rate much. The people who could be most helped are the ones carrying a balance, but rought 37% of U.S. cardholders have either maxed out their credit cards or come close to doing so. They're not really in a position to spend more since they're capped, and companies aren't going to offer a higher limit if they're only getting 10% back.
I could see something like this passing because it has such broad support, so it'll be interesting to see what actually happens.
I would love to see a post from you in the future about the disconnect between support for something when people don't realize they may be left out. There's almost a gambling aspect to it, but I'm not sure that's the right way to describe it.
For example, my students love the idea of a rent cap, no matter how much I go through the predictable side effects. They can't seem to fathom that they may not be able to get an apartment if landlords take some units off the market. They inherently assume they will be the lucky ones who benefit and someone else will be left out.
Insightful article, Jadrian Wooten. I'm glad to harness the call-to-action herein that exhorts me to access credit card interest rates set moderately than loans with less than 10% interest affixed to them. That way, I am assured of ready access to credit card facilities whenever I require them.
Thank you for this key takeaway. I sure appreciate it.
I heard a lot of people explain that this would effectively lock people out of the credit market including young consumers trying to build credit. Banks can offer higher rates so they become more sensitive to risk
I hadn't even considered the impact it would have on people's first attempt at accessing credit. I’d love to see more transparent reporting and clearer disclosures so people actually understand what they’re signing up for.
I got my first credit card at 18 because they were giving away free footlong subs. It has a $500 limit, is still open, and is probably buried in a safe somewhere because I don’t want to lose my oldest credit line.
Trump didn't ask congress to pass a law setting the 10% cap. He declared it a done deal like he was king in a post on the social media platform he owns and everyone pretended that was some sort normal presidential official act.
I went with his official statement at the World Economic Forum, which was, "I’m asking Congress to cap credit card interest rates at 10% for one year, and this will help millions of Americans save for a home."
Price controls often lead to black markets. Labor paid under the table to avoid minimum wages, or people converting their garage into an off-the-books apartment to avoid rent controls are common examples. Loans from family and friends sound like a nice alternative to credit cards. I think people are more likely to use payday lenders which also charge high interest rates for unsecured loans. Beyond that, credit markets for borrowers who need instant credit are likely to shift underground, exposing borrowers to usury. Of course, another possibility is that lenders develop an entirely new product that does the same thing as credit cards, but circumvents credit card regulation. In markets, as in Jurassic Park, life finds a way.
I agree that payday lenders are probably the main fallback, which is a much worse outcome for people who need access to credit. I hesitated to call it a “black market,” but friends-and-family loans could absolutely function that way if they’re charging more than the cap.
I saw that Bank of America is considering whether to offer a credit card with interest capped at 10% for a year: https://www.nbcnews.com/business/consumer/bank-america-considers-new-credit-card-capped-10-interest-rcna255495
Why do they keep proposing plans that go against basic level economic principles? My AP kids spotted the effects of a price ceiling right away when they first heard about it. Same with all the tariffs.
It’s tempting to say politicians clearly haven’t studied economics, but that’s not always true. AOC was an economics major!
A few economists have pegged this sort of belief in unsupported policies as “this time is different” syndrome. That seems like the most likely explanation.
Degree or otherwise, AOC clearly doesn't understand economics. If she did, as the old saw goes, she wouldn't be a socialist. You can't tell me *every* student who passes your econ class actually understands it and how it applies to the real world.
Almost all politicians eschew sound economic policy, because if they're unshackled by the laws of economics, there's no limit to what they can promise their constituents.
"It is difficult to get a man to understand something, when his salary depends on his not understanding it." -- Upton Sinclair
"Degree or otherwise, AOC clearly doesn't understand economics. If she did, as the old saw goes, she wouldn't be a socialist"
Capitalism has worked out brilliantly for the American working class.
"Capitalism has worked out brilliantly for the American working class."
I assume you're being sarcastic, but it is actually true. Even being part of the bottom 20% of earners today is better than being part of the bottom 20% of earners 100 years ago.
I wrote about this in a roundabout way here: https://www.mondayeconomist.com/p/how-sandwiches-can-explain-100-years
This analysis gets to the heart of the credit access problem. The borrowers most harmed by a well-intentioned cap are those at the margin - in consumer credit, that's individuals; in business credit, it's small and medium enterprises (SMEs). When banks can't price for risk, they don't lend to 'riskier' SMEs, pushing them toward expensive, opaque alternative lenders. Protecting access requires acknowledging risk, not legislating it away.
I always try to focus the article on personal experiences, but SMEs are a great example of another group impacted by this. Thank you for adding that insight.
This was a very interesting article from someone who is learning more about the credit space. This article was eye opening to the invisible consequences that banks and consumers are vulnerable to from the rate drop. Since banks are the ones approving credit cards they will reduce credit limits, deny credit applications, or make it even more competitive to get cards. It is going to be fascinating to see how credit card companies are affected. Will people be spending more because the rate is lower or will spending decrease from the reduced amount of credit approved. It will also be interesting to see how rewards and perks will be changed by issuers to help incentivize spending.
Given your experience in the space, what do you anticipate? I'd be curious to hear how credit card companies are internally talking about these types of policies.
I am not sure how credit card companies are internally talking about these polices and there has been no public statement about the rate changes from either company. I anticipate a cautious approach with incentives to continue high spending. After watching both stocks drop since the announcement, it seems that investors have concerns about a potential decrease in profitability from this or from the changes in cross-broader spending.
There's a really interesting issue here in that the people who can get lower rates likely aren't carrying a balance, so they don't care about the rate much. The people who could be most helped are the ones carrying a balance, but rought 37% of U.S. cardholders have either maxed out their credit cards or come close to doing so. They're not really in a position to spend more since they're capped, and companies aren't going to offer a higher limit if they're only getting 10% back.
I could see something like this passing because it has such broad support, so it'll be interesting to see what actually happens.
Such a good breakdown & really illustrates the gap between how we feel about money problems and what actually drives them.
I would love to see a post from you in the future about the disconnect between support for something when people don't realize they may be left out. There's almost a gambling aspect to it, but I'm not sure that's the right way to describe it.
For example, my students love the idea of a rent cap, no matter how much I go through the predictable side effects. They can't seem to fathom that they may not be able to get an apartment if landlords take some units off the market. They inherently assume they will be the lucky ones who benefit and someone else will be left out.
Insightful article, Jadrian Wooten. I'm glad to harness the call-to-action herein that exhorts me to access credit card interest rates set moderately than loans with less than 10% interest affixed to them. That way, I am assured of ready access to credit card facilities whenever I require them.
Thank you for this key takeaway. I sure appreciate it.
I just noticed we used the same cover photo for our articles :D
Finding out about Unsplash really changed the overall look of most of my articles. I was using some really awful pictures when I first started.
I heard a lot of people explain that this would effectively lock people out of the credit market including young consumers trying to build credit. Banks can offer higher rates so they become more sensitive to risk
I hadn't even considered the impact it would have on people's first attempt at accessing credit. I’d love to see more transparent reporting and clearer disclosures so people actually understand what they’re signing up for.
I got my first credit card at 18 because they were giving away free footlong subs. It has a $500 limit, is still open, and is probably buried in a safe somewhere because I don’t want to lose my oldest credit line.
Lol same! And agreed!
Trump didn't ask congress to pass a law setting the 10% cap. He declared it a done deal like he was king in a post on the social media platform he owns and everyone pretended that was some sort normal presidential official act.
I went with his official statement at the World Economic Forum, which was, "I’m asking Congress to cap credit card interest rates at 10% for one year, and this will help millions of Americans save for a home."