Destroying the Credit Card Industry

Congress is coming up with a new regulation that will hinder the unfair and abusive practice of the increase in banks’ interest rates on existing balances of credit cards. In fact, Vermont’s Senator Bernie Sanders went so far to propose that interest rates should be flatly capped at 15%. However, this proposal was voted down in the Senate.

Now, legions of consumers are upset because these interest rates caps have also been rejected in Congress. But there’re two sides to a story. Capping interest rates forcefully could backfire.

According to credit card companies, the interest rates that they’re charging are not simply a profit-making tool. It’s a tool that will offset the unpaid loan percentage – these are called net charge-offs.

These charge-offs are right now exploding to historic levels and will predictably keep rising due to the growth in unemployment. And since unemployment is usually the one lagging behind at recession’s end, maybe the nastiest days will still be ahead of us.

So we have to accept the fact that banks’ losses are piling up so fast, they can’t afford to impose the 15% interest rate cap. Otherwise, the industry might close down. Remember that consumers need healthy banks and banks need healthy consumers. Therefore, our crisis needs healthy cooperation from banks and consumers alike.