Wednesday, September 22, 2010

Jack Layton Wants to Take Away Your Credit Card

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.

3 comments:

  1. Heres a thought,

    Pay your balance off every month like i have since i was 18 and pay NO interest. Live within your means. That latest cell phone, I-pod, or Big screen can wait till you save up the money. Chances are it will have gone down in price while you save by 10 to 30 % and you get to keep that money for something else. OMG what a novel approach?

    Poor banks I guess they will just go out of business. That's ridiculous.

    70% of people pay off their balance 100% every month, that leaves 30% of people that sink in credit card debt. It's that 30 % the banks/CC compainies are making a killing on.

    tks,

    Paul.

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  2. Great idea. Folks only worthy of credit should get it. If you can't pay off your balance then it's probably better that you don't have a credit card till you learn to control spending.

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  3. @Paul: I agree that living within your means and paying the credit card bill in full every month is the way to go. I had heard that the percentage who carry a balance is higher than 30%, but maybe that is the difference between Canadian and U.S. statistics.

    @Anonymous: The only down side of cutting off credit for people who obviously can't handle it is that it will create a market for loan sharks.

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