In 2019, sponsors Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen. Bernie Sanders (I-Vt.) would have limited credit-card annual interest rates including finance charges to 15 percent.
In 2023, sponsor Sen. Josh Hawley (R-Mo.) sought to limit rates to 18 percent. In 2024, candidate Donald Trump said he would limit rates to 10 percent, which Ocasio-Cortez and Sanders support as well.
If such a measure were to pass, many customers would be forced to retire their current credit cards, and they would not be offered new cards.
Beyond that, interest-rate price controls would only be a Band-Aid. The underlying predation would continue. Politicians let credit-card producers create money and exploit people’s desire to be satisfied now. This is the root of the problem.
Borrowing brings satisfaction only temporarily, and at a stiff price. As of 2023, producer revenues were 26 percent of balances, taken as 23 percent interest plus 3 percent fees to customers. Politicians and crony producers together tear away chunks of people’s liberty.
Producers paid 5 percent for Fed funds, and priced in another 8 percent for defaults, 5 percent for risk premium, 4 percent for advertising, 3 percent for fees to customers, additional percentages of purchases for fees to retailers and for lesser rebates, and 1 percent for excess returns.
On the 8 percent for defaults plus 5 percent risk premium, innovators can help customers be able to pay off balances.
Some defaults result from politicians enabling bankers to create money out of thin air. Creating money causes booms and busts, and the during busts, some people lose jobs, income, or purchasing power. Innovators can monitor government-money-error cycles and evaluate what stage we’re in. When a household member becomes more likely to lose a job or income, innovators can appropriately limit the risk to everybody.
Further defaults result from customers spending unsustainably or choosing to not pay off balances. Innovators can build up customers’ financial stability by working better with customers: Keep interest prices low. Set credit limits low enough. Set substantial minimum payments. Never charge late-payment fees. Help customers reduce or skip payments when household members lose jobs or income. Provide further nonfinancial assistance.
Outstanding risk managers help customers prevent losses and limit the amounts lost. Insurer FM Global develops best practices, visits sites and recommends changes, and offers discounts. Health-sharing ministry Medi-Share develops health-improvement targets and offers discounts.
Long ago, lenders and borrowers lived in the same communities. Much lending was based on relationships. Borrowers’ lives were open books. Borrowers knew lenders. Later, lenders instead collected data that indirectly indicated borrowers’ character and solvency. Even now, though, lenders still don’t collaborate well with customers. And customers pay the price for defaults by other customers.
Innovators can seek key household financial data items discreetly. Customers can make household incomes, debt balances, savings, and loan-repayment data available to innovators. Tracked over time, these data will be highly predictive, greatly reducing risks. Innovators might reduce rates as much as 13 percentage points.
The remaining rate components controlled by producers add up to more than 8 percentage points.
Innovators can advertise chiefly by word of mouth. Known discounters like Walmart and Amazon can attract large volumes organically. Specialist producers can add more value and customers will spread the word.
Innovators can slash customer fees to zero. This also will reduce losses from defaults.
Innovators can process transactions more efficiently to reduce retailer fees, and can eliminate rebates. Retailer fees and customer rebates each currently approach 2 percent of purchases. Instead of paying full price, losing money, and getting back less, customers can just choose credit cards that are priced lower.
Innovators who manage risks and costs expertly will slash excess returns to near zero.
With better-managed risks and negligible advertising, fees, rewards and excess returns, credit cards can become simpler, more reliable products.
Innovators can help customers use credit well. Customers can help innovators set prices low. Together they could cut rates by more than 21 percentage points.
Liberty needs to be protected by innovators. Exploitation by government people, bankers and producers should be replaced with cooperation to please customers.
James Anthony is an experienced chemical engineer who applies process design, dynamics, and control to government processes. He is the author of The Constitution Needs a Good Party and Constitution Papers and the publisher of rConstitution.us.