I'll be the first to admit I am the sort of person who reads a lot of headlines, but doesn't ever get around to reading the actual article. I'll also be the first to admit that can be a very dangerous thing to do in this day and age. The media has proven time and again that they are simply in it for the "clicks" and as has always been the case, shaping the narrative to a particular viewpoint is never off the table.
However, this post isn't about whether or not you can trust what you see in your news feed. Instead, this post is actually about one of those headlines that I saw.
I often find myself flipping through my news feed late at night when I am getting ready to go to bed. My Pixel phone has this really awesome feature where it allows me to swipe left from the home screen and see a list of curated content for myself. I actually don't remember if that is where I saw this headline or if it was something that popped up on Facebook, but the headline claimed that several politicians from both side of the aisle were in favor of a limit on credit cards to 10% interest.
At first glance, this might seem like a really good thing. First of all, you have politicians actually agreeing on something and these days that is just about as rare as finding a news story you can trust. Then, on top of that you have the fact that they might be capping credit card interest rates to 10%. That's pretty huge. Especially given the fact that I recently got an add for a credit card in the mail and the base rate for the card was something like 28% interest.
Let's say you were to get that card and put a balance of $10,000 on it. Then let's say you can only afford to put $250 per month towards the payment for it. At an interest rate of 28%, it would take you nine years and ten months to pay that off. That's assuming you don't keep charging stuff to that card.
Pretty crazy right? Ten percent is sounding a lot better now isn't it? With a 10% interest rate, you cut your time almost in half taking four years and one month to pay off the card. Again, that assumes that you aren't charging more to the card.
And that's where the problem lies.
I think we can all agree a 10% cap on credit cards isn't going to make people spend their money smarter, it's just going to make them spend money they don't have more. My fear is that a cap at 10% will cause people to feel even more entitled with the way they throw away their money. Don't get me wrong, it's their money, if that is the way they choose to live, then so be it, but this really shouldn't be seen as the boon that it is being sold as.
I've made no secret of the fact that @mrsbozz and I had some decent financial struggles when we first met. I had my hours reduced to part time for a while and though my salary had been cut in half, I didn't do much to cut my spending in half. @mrsbozz was a bit better than me, but she had student loans from her graduate degree and some other more reasonable debts that she had acquired.
We were a good $25,000 in debt before we were even married. Thankfully, we had the ambition and wisdom to sign up for a debt consolidation loan. Those interest rates that were in the 20% range suddenly dropped to the 6% range (rates were so good back then!), and we were able to pay off the five year loan in just three years becoming one step closer to being debt free.
Ideally, people would take advantage of the capped rates to perhaps consolidate their debt a little bit and dig themselves out of the hole they are in, but as I said, I think we can all agree it will give many the green flag to just spend more.
@tarazkp has written many good posts talking about the fact that we are a world of consumers and for most of the world instant gratification takes abject priority over pretty much anything else. Changing the penalty is going to have very little impact towards changing the behavior. Personally, I think this is all focusing on the wrong thing.
I do concede there are likely some who would benefit from a move like this. Sadly, I think they are the minority and a smarter track would be educating people about the dangers of interest in general. It's not just high rates that can come back to bite you. Remember, banks really only make their money one way.
What do you think? Is this 10% cap on interest rates a good idea or is it simply putting a bandaid on a hemorrhage? Nevermind the fact that you are now messing with these companies bread and butter. I don't see any way the corporate lobby allows this to pass into existence.
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