Time for usury limits on credit card interest rates

US inflation rate, up; GDP growth, down. European growth is slowing. China’s currency down 4.2%. The Russian invasion of Ukraine is disrupting key supply chains as if they hadn’t weathered rocky and largely self-inflicted wounds. Higher commodity prices.

The combination worried many. For example, yesterday’s US edition of the Financial Times had the top headline, “Gloomy data fuels stagflation fears.” unemployment is considered. The latter is far from high, but when it comes to the economy, who knows? Given that the number of available jobs exceeds the number of jobs available, millions are still working part-time because they cannot find a full-time job, and labor force participation is still below pre-pandemic levels, perhaps there is a similar effect .

The Fed has an interesting election next week. Will the likely 0.5% rate hike be scrapped next week amid fears that the economy could falter? Or will it hold current levels amid fears that inflation could rise further?

A good consideration for those who are feeling relatively comfortable and able to weather the waves of economic uncertainty. But there are already major interest rate problems that are in full swing. Consider the current state of ordinary credit card debt as shown in the chart below.

Consumer credit use can explode as the country tries to emerge from a recession — note the 2010 surge following the 2007-09 global financial crisis and the collapse after use declined as people defaulted, lost credit, or try to repay them security.

Credit usage had mostly increased since then, falling during the pandemic — with bailout funds helping people dig out of a hole in part — and then starting to rise in the first quarter of 2021 when things seemed to be getting better.

Consider high card interest now. When CreditCards.com recently noticed thisFor example, the APR for new cards was 16.36%, the highest since April 2020. Rates are also going way higher.

The country seems addicted to credit card debt. There are a couple of reasons. One of them is that they offer unsecured access to credit. People don’t have to pledge assets against access. This is considered riskier than something like a car loan or mortgage, where property can be reclaimed in the event of default. But how risky?

That late rate– not default, but delinquency – on credit card loans from all commercial banks from 1991 to October 2021, deep in the Great Recession of 2009, was 6.61%. At the end of 2021 it was 1.62%.

debit rates? They reached 11% in the second quarter of 2010, which again is clearly due to massive unemployment and homelessness. Depreciation was 4% at the start of the pandemic and 1.6% at the end of 2021.

All of this seems much safer than the “We’re taking a big risk” talk from financial services firms.

The other big reason for using credit cards is that the issuing companies, companies that sell things, and others are all pushing for the “convenience” of cards. The product seller closes deals more easily. Financial services firms boodle on interest. Points, cashback percentages, interest-free periods, special offers, these are all techniques to emotionally manipulate people and get them to use their cards because so many have balances. Credit card companies don’t want consumers to pay off their debts regularly because they don’t make as much money.

This becomes modern debt bondage. People are sold into debt they can’t understand until they’re deep in it. The real money is made on those who have lower incomes and are easier to catch and then pump for years, a ready source of green blood issuers to brag about to investors.

As much as the industry wants to present all of this as a service to consumers who aren’t in the top quartile of economic ability, it ultimately doesn’t help if it keeps people thinking. Consumers are the force behind the economy as they account for around 70% of GDP. Would it be less without credit card spending? Probably, but the trade-off would be greater stability, predictability, and public morality.

The government could do something about this by recognizing an effective usurious interest rate and stop turning people into the fiscal equivalent of the mountains of bodies into cells that power soulless machines in the movie The Matrix.

Will elected officials do this? It would be surprising if any of them even talked about it. Financial services are so sacrosanct that even when their dishonorable and predatory actions plunged the world economy into a brink, they were still saved, especially when they were too big to fail.

The country needs to shift its priorities more to the hundreds of millions of citizens and their needs to find a better balance. Businesses exist to serve society. Unfortunately, the relationship is the complete opposite.

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