664. Why Is Capping Credit Card Interest Is A Bad Idea?

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Hello, lovely listeners, welcome back to another episode of The Way The World Works. Today I want to talk about credit card interest, which I promise you is going to be more exciting than it sounds. So first, let's jump into it.

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Why are we talking about credit card interest? Well, it is something that's just really good to know, especially because taking care of your personal finances is a great way to make sure that you are self sufficient, that you are responsible. And you know, like we always say, if you can improve yourself, you can take on bigger projects like making the world a better place. Now it's in the news right now.

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So the reason it is relevant is because President Trump is asking Congress if they can cap credit card interest at about 10%. What are those words mean? Let's get into it. So by cap, what I mean is to set a limit.

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So basically, President Trump wants to ask Congress to tell credit card companies that they are not allowed to charge more than 10% interest to people who use credit cards. Now, pause there. I want to talk a little bit about credit, how credit card works, how credit, how credit cards will work.

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So you might see your parents go to the store and, you know, swipe a credit card or use the chip. Or nowadays, if they're like me, I don't even bring my cards with me. I just take my phone and I have my Apple Pay on everything.

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So I really just press a button and hold it close to the, the little card swiper. So we see that, but what is it? And how is it different than a debit card? Now, a debit card is the same thing. Have it on your, you know, Google phone or Google phone, iPhone or Apple Pay.

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I don't know where that came from. Or you can have the physical card, but with a debit card, it takes that money directly from your bank account. So it's money that you have in your bank account.

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A credit card works on credit, which means somebody gave you credits. They gave you a certain amount of money. You applied to a bank and a bank said, they looked at your payment history.

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They made sure you're paying your bills on time. They looked at how much money you make a year. And they said, okay, based on all this information, we're going to give you credit.

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So you don't actually have this money. It's our money. We're going to give it to you as long as you promise to pay it back.

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But if you don't pay it on time every month, we're going to charge you a certain, a certain amount of interest. Every time that you miss a bill, every time that you're, uh, that you don't do what you promise to do, which is to, to pay your bills on time. So you can swipe that card up to a certain amount, pay it back.

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Now, if you're, if you're smart and you know how to use credit cards, and this is something that took me a long time to learn is when you swipe your credit card, you only want to use the money that you already have. So credit cards are great for emergencies. If something happens and the world is unpredictable, it's nice to know you have that credit that you can use as an emergency if you don't have enough in your bank account, but you do have to pay it back.

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And if you can't pay it back all at once, again, you're going to get charged that interest. And that's something that's just the way it works. That's something we all understand.

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And again, like something that I do that a lot of people do is I never spend more than I have in my bank account. And I pay off my entire balance every month, which helps my credit score go up. And because credit cards have points.

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So like every time I use my card, I get airline miles. I get it. Actually, it's great.

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I get free money as long as I'm paying it off on time. OK, so that's how credit cards work. Now, what does it mean to cap at the interest? Well, I mentioned that if you don't pay off your bill every month, you are going to get charged interest on the money you spent, which is a really good incentive.

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We love that word. A really good incentive to pay your bill on time, right? Because it's free money when you get the points, like when you get when you pay it off with money you already have and then you get some airline miles like that's great. It's a win win.

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But if you're using it and you're getting some airline miles, but then you're also paying twenty five or whatever that your interest amount is, you're also paying that interest rate on top of it. You're not you're actually not you're not coming out on top. Right.

But maybe again, maybe you had a car breakdown and you needed that money so they can there's situations where that can be helpful either way. OK, so not everybody can get a credit card. There are people you have to show that you have paid your bills on time.

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You have to show that you make enough money to even pay back what they give you. All right. We've set that aside.

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Now let's go back to what President Trump is trying to do. So President Trump wants to limit the interest rate that credit cards can charge you if you don't pay your bill to 10 percent. Now, if you just hear this right away and you think, OK, well, you know, Americans have so much credit card debt.

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We are you know, we we use it when we don't have the money to pay it back. This is really great. We should protect consumers.

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And you're going to hear this a lot. Every time somebody tries to pass some economic law that is in reality something they shouldn't do because they shouldn't interfere with the market, the government has no place doing that. But every time you hear, you know, consumer protection, it should raise a little red flag in your head because you're thinking like, OK, what what do I need protecting from? Please tell me, almighty government, what you think I need protection from.

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So in this case, they're saying that they are meeting the government or in this case, President Trump is saying, you know, Americans are burdened. They're taking on too much credit card debt. And then if they don't, if they can't pay it back, if something happens, they're getting buried by this interest.

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We need to stop this. We need to help every day, you know, hardworking Americans. And we need to cap the interest rate.

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And some people, in fact, honestly, this is more of like a liberal leading policy than it is for somebody who's a fiscal conservative or somebody who's economically conservative and wants more less government control and more free market. But people on both sides of the aisle are falling for this. They're saying, OK, even if they don't like President Trump, they're saying, OK, this is actually really good.

We do need to stop our credit card debt problem. But there's a problem with that. Not only does it interfere with the market, but you're actually going to take you're going to end up harming the people who actually benefit from the high interest.

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How is that possible? How can people benefit from high interest? Well, that's what we're going to get into next time or next time, meaning right now. So there are a lot of people who don't have great credit. And I'll just tell a personal story right after college.

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You know, I was not smart with credit cards. And so I ended up getting myself into a big problem where it took me years to pay off the debt. And for a while, credit card companies wouldn't give me a credit card.

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I had gotten into trouble. And of course they wouldn't. Why would they give me a credit card when I had shown that I wasn't good at paying it back? I was high risk.

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I shouldn't have had a credit card. You know, I didn't know how to use it properly yet. So there are a lot of people in that situation.

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Unfortunately, I think there's something like most Americans only have four hundred dollars in their savings account. So not everybody is financially wise, especially when you've got young kids and then young kids who are taking out tons of student loan debt. It can turn into a mess really, really quickly.

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So there are people that have, you know, that either like I was when I was younger, I have proven that I wasn't responsible with credit cards or there's people that just don't have credit, meaning they've they're early on in their lives or maybe they have they had to start from the beginning so they haven't gotten loans. And this is the credit system. When you have a credit score is kind of confusing because you need to have credit to raise your credit score, but nobody is going to give you credit if you don't have a history with a credit score.

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So it's it's kind of this complicated thing. Right. Which is why high credit card interest rates are so good.

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So let's say you are somebody who's 18. You're you actually got a pretty good job. You're going to work in the summer before you go to college or whatever it is.

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Maybe you're not going to college. You're doing what's best for you. And you don't have a credit score yet.

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You have no credit history because you're brand new to adulthood. So the credit card company is looking at your application and they say, OK, they have a job. So that's great.

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We know how much they make. We know that they have a monthly income where they can pay a bill, but they have no credit history. So we don't actually know if they can pay a bill yet or if they will.

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There's just we don't know. You need to have that track record. We're going to give them a very little amount of credit.

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Let's say we're going to give them twenty five hundred dollars, but we're going to give them a higher interest rate because we want to hedge our bets. You know, we're giving them our money. And if they don't pay that back, that's on us.

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So we're going to charge a higher interest rate as a way to say, OK, we're going to we're going to give you this, but we don't know yet if you're going to pay it back because we just don't know enough about you. So we're going to make the interest rate higher than somebody who has a very good credit history, a very good credit score. And honestly, that's going to do two things.

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You're going to be so happy that you got that credit. And if you're smart, unlike I was when I was a college student, you're going to be incentivized because you're going to say, you know what? I don't want to be paying such a high interest rate every single month if I don't pay this bill. I'm going to pay this bill on time so that I avoid avoid having to do that.

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OK, so that's going to make you it's going to incentivize you to be better at paying your bill. It's also going to incentivize you to maybe want to build a better credit score faster because the interest rates start going down when companies start trusting you, when the banks start trusting you and seeing that you have a good history. OK, so.

Is it harder, does it make it more difficult when there's a higher interest rate because it does make it harder to pay it back if you don't pay it every month? Yes, but that's kind of the whole point, right? If they're giving you banks, giving you money, you do need to prove that you are going to do what you promise to do. So. It sounds like the capping at 10 percent is a good thing because you think, yes, let's you know, people are struggling, let's give them that leg up.

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But. What you're really doing is you're not you're taking credit card companies or banks ability to watch out for themselves, you're taking that away. And so people who don't really think about this in terms of of like, what is this going to mean long term? They hear lower interest rates.

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I think that's great for me. I can't afford to pay my credit cards every month. The interest is getting so high.

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This is great. I support this. But let's talk about some unseen consequences that maybe aren't as apparent, that are very apparent to those of us who know what's going on.

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So in reality, capping the credit card interest amount is not going to help you. What it's going to do or help those who are struggling, what it's going to do is it's going to make credit card companies and banks say, you know what? It's not worth the risk for us to give this person with a, you know, no credit history or somebody, you know, like I used to be where I wasn't good with credit cards and I'm having to rebuild my credit score, I was years ago. You're telling that you're basically telling the banks you're you're incentivizing this 10 percent cap is incentivizing banks and credit card companies to say, you know what? It's not worth the risk for us to give you this money when you might not pay it back.

OK, and if we have this low interest rate, if it's only 10 percent interest rate, maybe every month when your bill comes to you, you're like 10 percent. OK, that's not that much. I'm just not going to pay my bill this month.

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But that adds up very, very quickly. So what credit card companies and banks are going to end up doing is they're going to say, no, we're not going to give credit cards to these people and they're just going to deny them because you have to be accepted. So these people that think it's going to help them get ahead by keeping their interest rates low on their bill every month are probably going to find out very quickly that with low credit scores and with a bad history, maybe of paying back, they're just not going to get credit cards.

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And where I do think credit cards have posed a lot of problems, they have made people get into debt again. They're also very nice to have in case of an emergency. There are situations where credit cards are actually a very good thing.

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And if you're doing what I do and a lot of people do where you're gaming the point system and you're making sure you pay it off every month, they can be amazingly beneficial. And then when you're building your credit score, that's also good if you want to buy a house someday, because mortgage loan mortgage lenders, people who are going to give you loans to buy your home, they're going to look at that credit score and say, OK, they've proven they can pay things back. We're going to give them this much for a home.

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So it's going to look good across the board because your credit score and we could have another discussion on whether our credit score system is good or not. But it does matter in the world that we live in. It is very important.

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And if you're never allowed to get that credit history or you're never allowed to rebuild credit and start over again, then you're not going to you're in you're you're stopping your ability or you're impeding your ability to to build that credit score and to get ahead in life. So this is a huge problem. But people aren't seeing that.

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They're only seeing the immediate. My bill is going to be cheaper if I don't pay my credit card bill this month and that interest gets tacked on. So this is this is scary.

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It's scary that we're not seeing the big picture, but it's also scary because people don't realize how how bad this is going to be for all of us in the long run. And I think it was JP Morgan. He said this recently.

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He's like, I don't think you guys realize credit card companies are going to be fine. Like the banks are going to be fine. We're going to get through this.

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It's you guys. It's the consumers who are going to find out very quickly that these credit card interest caps, they hurt you way more than they hurt us. So the 10 percent interest don't be don't be fooled into thinking that this is something that's going to help the people.

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It's not. And don't be fooled that this is going to be something that's going to incentivize the credit card companies to want to lower it even more. Like JP Morgan said, listen to that.

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He said, we're going to be fine because guess who always comes out? OK, whenever there's things like this, the big banks, the big banks always come out fine. Oh, there were a few that we thought were too big to fail that that did fail during the Great Recession. But for the most part, the real moneymakers, they go on.

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Business continues. But the 10 percent cap is going to hurt the most vulnerable, the most economically vulnerable in our society who are really trying to build that credit score or who want to the younger people who want to build credit from scratch. So there's a lot of reasons why the higher interest rates work for everybody.

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For one, it incentivizes the credit card companies and the banks to to take a risk on you if you don't have a perfect credit score, which in turn makes you really grateful that now you have that opportunity to build your credit. And so that incentivizes you to pay your bill on time. And also, you don't want to get stuck with the higher interest rate if you don't pay off your bill every month.

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So that's also incentivizing you. So the market works. The incentives work.

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And what were these things get seen as like predatory, as they say? Like, oh, it's it's, you know, preying on the most vulnerable. It's actually giving them an opportunity. And we have to stop and look at that, because the capping at a 10 percent interest is actually a horrible idea.

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It's going to have consequences that a lot of people just aren't seeing right now. So remember, you know, what Frederick Bastia said, there's always things that are unseen when there are economic policies and plans, and we need to think of that. So we will leave it there.

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I say we, of course, I mean, I will leave it there. As always, don't forget to like and subscribe to the podcast. And until next time, guys, I will talk to you later.