I tend to avoid talking about politics because I tend to dislike all of the political parties for one reason or another, but I was struck by one of Jack Layton's remarks in an interview on CBC radio. He said that he wants to limit credit-card interest rates to 5% over prime. This sounds good, but he doesn’t mention the likely consequences.
Whether we like it or not, banks are in the business of making money. They offer credit cards because they make money from them. The high interest rates offset the losses from a fraction of credit-card holders who default. If interest rates are capped, banks will only offer credit cards to more credit-worthy people.
If this 5% over prime cap came into effect and the banks could find no loopholes for replacing the lost interest charges, they would cancel hundreds of thousands or possibly millions of credit cards in Canada. Even people with steady jobs would have difficulty getting a credit card if their pay level is too low.
In principle I’m not against cutting off the supply of high-interest credit. Of course, credit cards aren’t the only form of credit that charges high interest. Layton would have to limit the interest rate charged everywhere else as well. The only remaining problem would be loan sharks – a problem severe enough to make it a bad idea to just cut off the supply of legal credit.
Canadians would likely be better off if they could only borrow as much as banks are willing to give them at prime plus 5%. I don't know how to regulate lending to reduce interest rates without nasty consequences such as cutting off credit for millions of Canadians and a booming illegal loan-shark industry.