The proposal may not get through Congress now, but that calculus could change if Democrats gain control of the Senate in 2020, Jaret Seiberg, an analyst with Cowen’s Washington Research Group, said in a research note. “The progressive attack is organized and there are multiple paths for them to achieve victory. It is why we believe this is a risk that is worth monitoring,” he said.<doc-sep>Nobody should ever pay a 25% interest rate to a credit-card issuer. With that said, the understandable urge to pass a law capping what banks can charge could hurt the very people it’s meant to help, and cause other problems that may ravage people’s finances even worse. On Thursday, Democrats Bernie Sanders and Alexandria Ocasio-Cortez introduced new legislation that would cap credit-card interest rates at 15%, and require the U.S. Postal Service to offer basic banking services for those who can’t afford a traditional bank. The bill addresses legitimate problems. Millions of Americans are “unbanked” or “underbanked,” with limited access to modern financial tools that help people get ahead. And high rates often charged to low-income borrowers can lock in an unbreakable cycle of debt and poverty. Solutions aren’t as obvious as they seem, however. Banks would lose revenue if there were a federal cap on card interest rates, which is why they oppose such a move. Don’t cry for them. Banks would be fine, but they’d make other adjustments that the New York City congresswoman and Vermont senator may not be anticipating. Banks set rates according to the riskiness of the borrower — and if 15% were the most they could charge for what are basically loans via credit card, they’d curtail borrowing limits. It could result in credit to fewer people. Some consumers with weak credit might not even be able to get a card —even if they paid off the balance each month and never paid interest. Fees might also rise just for having a card. And people who do get cards might try to borrow more via plastic, if rates were lower and it cost them less (another wrong incentive). So unintended consequences of a cap would include less access to credit for some and more credit-card debt, at a slightly less onerous rate, for others. This Feb. 20, 2019, photo shows logos for credit cards in Zelienople, Pa. On Friday, April 5, the Federal Reserve releases its February report on consumer borrowing. (AP Photo/Keith Srakocic) People run up costly credit-card balances for a couple reasons. Some people are just uninformed or undisciplined consumers. The best solution there is consumer education, along with new tools like financial-planning apps that can help people manage money, and send alerts when spending levels are too high. Story continues Others rely on credit cards because they simply lack the cash to buy basics when they need them, which is a tougher problem. As bad as credit-card debt is, it’s better than borrowing from a payday lender or illicit loan shark. The core solutions here are improved financial literacy, better skills and stronger earning power for the most vulnerable consumers. None of those are a quick fix. That speaks to the second part of the Sander-AOC plan, which is postal banking. The postal service has outlets in most American communities, and it already cashes government-issued checks. So why not expand that to basic financial services? Other countries do, including France, the U.K., Germany, Japan and South Korea. This could work, but only if done carefully. It’s possible for the postal service to offer savings and checking accounts, debit cards, ATMs for cash withdrawal and other basic services that entail little risk. There are legitimate questions about whether an agency backed by the federal government should compete for customers with private-sector banks. But it would be possible to tailor a menu of postal financial services so narrowly that there’d be little overlap. The legislative proposal would go further, requiring the postal service to offer low-interest loans— and this is where the problem begins. Anybody making a loan faces a risk of not getting their money back, which is why banks do extensive research to establish creditworthiness standards. That’s a core expertise of banking. Riskier borrowers pay higher interest rates, because it’s more likely they’ll default on a loan. People banking with the postal service, instead of an established bank, would probably be risker borrowers, by nature. So “low interest” loans that aren’t priced to account for the risk of default would have to be subsidized by taxpayers (or by somebody). Washington did this in the past with housing, and it contributed to the gigantic housing bust that caused the Great Recession of 2009. The postal service is already a chronic money-loser, and that problem could get dramatically worse if it started making loans. Credit used to be something Americans used sparingly, for a major investment like a home—if they could get it at all. By contrast, credit cards are a modern innovation that enticed everybody to spend more, and worry about paying for it later. That now seems to have created an expectation that everybody is entitled to credit— even if you might not be able to pay back what you borrow. Maybe we should rethink that. Confidential tip line: rickjnewman@yahoo.com. Encrypted communication available. Click here to get Rick’s stories by email. Read more: How Trump is blowing it with voters Why Medicare for all is doomed The stock market liked these presidents better than Trump Joe Biden’s economic views need a major update The Mueller report thoroughly impugns Trump Winter is coming for big business Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman<doc-sep>Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez announced new legislation Thursday to cap credit card interest rates at 15%, a move that they said will help protect consumers from the "greed" of the credit card and banking industries. Sanders, who is vying for the 2020 Democratic presidential nomination, referred to credit card industry executives as "loan shark hoodlums" in three-piece suits as he outlined the legislation. He also accused the industry of "grotesque and disgusting" behavior. "Let's be clear what we're talking about: We're talking about economic brutality," Sanders said in announcing the plan during a Facebook livestream with Ocasio-Cortez. "We are talking about some of the most powerful people in the world, people who make millions and millions of dollars a year, and banks that make billions of dollars a year in profit. And they see a real profit center in going after desperate people...who cannot afford the basic necessities of life." Credit card companies collected $180 billion in revenue from interest and fees last year, according to a summary of the proposal released by Sanders' office. Banks can borrow at 2.5% interest rates from the Federal Reserve, but the average credit card interest rate currently for consumers is a record-breaking 17.71%, the lawmakers noted. In 1978, the Supreme Court overturned state laws protecting against usury by ruling that states could set their own interest rate laws. The bill would allow for the Federal Reserve to allow lenders to charge higher rates, if it determines that the national usury cap would threaten the safety and soundness of financial institutions. Interest rates could only be raised above 15% for a maximum of 18 months, according to the proposal. The 15% ceiling proposed is the same interest rate cap that Congress imposed on credit unions almost 40 years ago. Ocasio-Cortez said tightening the interest rate rules was a moral issue. She said the industry for too long has been allowed to use people's personal misfortunes and income status to profit through predatory lending. "This isn't anything radical, because we had these laws for a very long time," Ocasio-Cortez said. "We had them in red states, we had them in blue states. We had them in half of the United States." Ever since then, she said, credit card companies and big banks can "charge extortion level interest rates to the poor." More: Who is running for president in 2020? An interactive guide More:4 decades separate 2020's presidential candidates. Here's what that looks like. Payday loans would also be subject to these rules, which could undercut an industry that has flourished in poor and minority communities where consumers sometimes find traditional credit difficult to obtain. The legislation is likely to face an uphill battle in Congress, at least in the near term. Ninety percent of consumers said that they wanted a cap on credit card interest rates, according to a recent survey by CompareCards.com. Matt Schulz, the chief industry analyst for CompareCards, said there is "a less than 0% chance" of the Sanders and Ocasio-Cortez legislation happening during President Donald Trump's administration. But he said it could be possible to see movement on the issue if Democrats take the White House in 2020. "There are powerful people and groups that have billions of reasons to make sure it doesn't happen," Schulz said. "But if the winds of political change blow through Washington, D.C., next year, I’d expect that the fight will happen, simply because so many Americans want it to." There would likely be pushback from the credit card companies, said Ted Rossman, an industry analyst with CreditCards.com. “It would cut into their profits,’’ he said, “and they would say they should have the right to charge more because they’re extending unsecured credit and there’s no guarantee they’ll be paid back and there are no assets on the line as collateral.’’ The average card interest rate offered to those with good credit is 17.73%, Rossman said, while those with lower scores see an average rate of 24.99%. That’s compared to an average 30-year fixed mortgage rate of 4.29%, and an average 4.78% interest rate on a car loan repaid over five years. While a 15% interest rate cap on credit cards would be lower than what many Americans have, it can still weigh down balance-carrying borrowers with debt. “I don’t even want you paying 15%,’’ Rossman says. “Fifteen percent, 20%, 25% are all big numbers. If you’re paying anything like that for any length of time it’s going to be harmful to your overall financial picture, so it really does pay off to cut your expenses, take on a side hustle, sell some stuff on eBay, whatever you can do to make credit card debt a priority.'' For Sanders' campaign, the legislation offers an opportunity to make his case to Democratic primary voters that he has been a champion of greater regulation of the financial industry. Sanders' push for the legislation comes as another presidential hopeful, Sen. Elizabeth Warren, has unveiled a series of policy proposals that she said she would pursue if she wins the White House. She has floated legislation to eliminate college loan debt for most Americans and a $100 billion program to address the opioid crisis over the next decade. Warren says she would pay for the programs, as well as others, by raising $2.75 trillion in new revenue with a tax on America's wealthiest households. Opioid crisis:Elizabeth Warren: Send executives to jail for their role in the opioid epidemic Biden stumps:Biden jokes he's only 'real Irishman' running for president. Delaney searches for 'civil' response In October, on the 10-year anniversary of the federal government's $700 billion Wall Street bailout, Sanders introduced legislation that called for breaking up some of the nation's biggest banks, including JPMorgan Chase, Bank of America, Citigroup, Wells Fargo & Co., as well as behemoth financial institutions such as Berkshire Hathaway, Prudential Financial and MetLife. The new legislative proposal could also give Sanders opportunity to go after 2020 Democratic front-runner Joe Biden as the presidential race heats up.<doc-sep>Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez have a new target: credit card companies. The lawmakers, who identify as democratic socialists, unveiled a plan Thursday to cap credit card interest rates at 15%. The measure aims to cut current rates significantly: the national average annual percentage rate hit 17.73% this month, while the median was 21.36%, according to CreditCards.com. "Today, we're telling Wall Street and the payday lenders that enough is enough," Sanders said in joint remarks with Ocasio-Cortez streamed on Twitter. The Vermont independent told The Washington Post, which first reported the plan, he was "sure" it would face criticism, but added, "Maybe Congress should stand up for ordinary people." Speaking to potential criticism, Ocasio-Cortez said 15% interest on credit cards "is a lot." She argued that "you can run a bank" and "continue to be profitable" at those levels. The measure will have a tough time getting through Congress, particularly the Republican-held Senate. The banking industry will oppose it. But the proposal still sends a message: it comes amid a 2020 Democratic presidential primary in which contenders have tried to cast themselves as the strongest champion for workers and consumers. Sanders has made his case for the presidency in large part by calling out what he calls corporate greed and the need for better protections for workers and consumers. Ocasio-Cortez, a first-term representative from New York, has caused a stir during her short tenure by embracing dramatic proposals, such as the Green New Deal, to overhaul the U.S. economy and tax system. Sanders' office did not immediately respond to a request to comment on the legislation. CNBC could not immediately reach Ocasio-Cortez's office. The American Bankers Association, a trade group for the banking industry, criticized the proposal. "Today consumers benefit from a highly competitive and vibrant credit market," ABA spokesman Jeff Sigmund said. "It would be a mistake for the government to artificially limit those choices. This specific proposal will only harm consumers by restricting access to credit for those who need it the most and driving them toward less regulated, more costly alternatives." The bill comes amid mounting debt in the U.S. Outstanding consumer debt topped $4 trillion for the first time in February, CNBC previously reported. Nearly 90% of Americans support a cap on interest rates that financial institutions can charge on credit cards, according to a February survey from CompareCards. Matt Schulz, chief industry analyst at CompareCards, said "many people don't understand that there already is a credit card cap in America, it just doesn't apply to banks." Rates for credit union credit cards cannot top 18%, he said. The Sanders and Ocasio-Cortez plan fits into a campaign strategy already deployed by Sanders and Sen. Elizabeth Warren, a Massachusetts Democrat and consumer advocate. They have not only put forward policies designed to boost consumers, but also criticized former Vice President Joe Biden — who has led most early polls in the Democratic primary — for being too cozy with Wall Street and credit card companies. Financial companies have a large presence in Delaware, which Biden represented in the Senate for decades. Warren has said Biden was "on the side of the credit card companies" during a fight over a bill, passed in 2005 with Biden's support, which made it harder for individuals to declare bankruptcy and wipe out debt. Biden campaign spokesman Andrew Bates previously told Vox that, because the legislation "was a certainty" to get through the GOP-held Congress and White House, Biden worked to win "important concessions for middle class families" as part of the plan. — CNBC's Jessica Dickler contributed to this report Subscribe to CNBC on YouTube.<doc-sep>
Bernie Sanders and Alexandria Ocasio-Cortez want to cap interest rates on credit cards and other loans at 15%. But such a plan wouldn’t just hurt banks — it could also have major consequences for consumers. Sanders, an independent senator from Vermont, and Ocasio-Cortez, a Democratic representative from New York, plan to introduce legislation they have dubbed the “Loan Shark Prevention Act.” The bill would establish, among other things, a 15% cap on credit-card interest rates and allow states to create lower limits. Currently, the average credit-card interest rate is at a record high of 17.73%, according to data from CreditCards.com. In defending the proposal, Sanders described bank issuers’ interest-rate practices as “grotesque and disgusting.” “You have Wall Street and credit card companies charging people outrageously high interest rates when they are desperate and they need money to survive,” Sanders said. He’s cited past precedent as support for the cap: In 1980, Congress established a 15% cap on credit union interest rates. At one time, interest-rate limits or “usury caps” were common across the U.S. Don’t miss:American Express relaunches Blue Cash Preferred credit card — with cashback for Netflix, Amazon, Lyft and Uber Creating a new lower limit on the credit-card interest rates could lead to a whole host of changes that may negatively affect consumers. “No one benefits from this cap,” said Odysseas Papadimitriou, chief executive of personal-finance website WalletHub. “Fifteen percent is major, as the average interest rate is higher than that for everyone except people with excellent credit. So the cap would lead to a lot more expensive alternatives to a lot of consumers.” Here are some of the ways the plan from Sanders and Ocasio-Cortez could backfire, if it were to be passed by Congress: It could spell the end of credit-card rewards When the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act went into effect in 2010, debit-card rewards all but ceased to exist. The amendment capped the interchange fees debit-card issuers could charge to retailers. Banks had used the revenue from those fees to finance the debit rewards programs — so when that well ran dry, the programs were terminated. A similar fate could await credit-card rewards if interest rates were capped, said Matt Schulz, chief industry analyst at personal-finance site CompareCards.com. “Anything that hits banks’ bottom lines hard, as this certainly would, could lead to less lucrative credit card rewards,” he said. “Banks are already a little queasy about the high cost of the rewards arms race, so taking a big bite out of their interest revenue certainly wouldn’t help.” Nor is this proposal as unusual as one might think. Until the 1970s and 1980s, most states had usury caps for consumer loans, and some still do for payday loans, according to the National Consumer Law Center. But a 1978 Supreme Court decision allowed banks to charge their home state’s interest rate to customers at the national level, which prompted some states including South Dakota and Delaware to abandon their limits in order to attract banks to set up shop there. Federal lawmakers subsequently passed deregulatory legislation to loosen lending amid the double-digit inflation in the 1980s. Also see:Why companies from T-Mobile to SoFi want to get into banking It could lead to an increase in the fees charged to card holders Banks would want to maintain credit-card rewards programs if at all possible because they’re an easy way to differentiate a credit card and give it an advantage over competitors’ offerings. So card issuers could look to other ways to generate revenue that will support these rewards programs — and raising fees on consumers would likely be one of their main tactics. Ted Rossman, industry analyst at CreditCards.com, compared the hypothetical situation to the airline industry. “Airlines are really good at nickel-and-diming passengers, too,” he said. “When costs like employee salaries and gas prices rise, airlines look to make that up through bag fees, seat assignment fees, etc.” See also: Flight fees are on the rise — here’s how to avoid them More cards would likely come with annual fees in such a scenario. But other new fees could be instituted, too, such as fees to get a higher credit limit. And existing fees such as late-payment fees would probably go up, said Brian Karimzad, co-founder of personal-finance website MagnifyMoney.