When liberals go after credit cards

OPINION:

Bernie Sanders, Alexandria Ocasio-Cortez and the rest of the torch and pitchfork crowd have their fingers in your wallet once again. This time, they’re after your credit cards. They think the interest rates are too high and that fat cat bankers are getting rich on the backs of the peasants that use them. In fact, Sen. Sanders went so far as to say that credit card lenders are “loan-shark hoodlums.” Rep. Ocasio-Cortez exclaimed that credit card issuers will “take your home.”

Political hyperbole aside, let’s fact check credit card interest rates, and bank profits on card lending. What the anti-Wall Street gang calls usury is not even close. They want a federal law limiting interest charged on credit cards at 15 percent. This even though the Federal Reserve Bank most recently reported that nationally in the first quarter of 2019 the average interest rate on all credit cards was 15.09 percent. Is that not close enough?

Granted, not all credit cards charge the national average interest rate, but even when counting just those cards carrying balances and paying interest, it amounts to only 16.9 percent — not even two percentage points more than their proposed limit. Realize, that cards carrying balances also carry a higher risk of default. Last year banks charged off 8 percent of all credit card balances as dead losses, so a few percentage points as a risk premium seems pretty reasonable.

But, aside from losses, there are plenty of other costs to running a credit card business. The money to fund it has to come from somewhere and that means banks have to build branches, hire tellers, install ATMs and pay interest on deposits. Agreed, you don’t get paid much for your savings account, but all that brick, mortar, labor, and computer power costs banks billions of dollars a year.

Next, the banks have to bill, collect, and keep records of every transaction — this is called servicing. Again, this is all about a lot of computers and people processing millions of accounts every month. It’s not cheap. This isn’t an apology for banks, by the way. It’s the simple fact that stuff costs money and the Democratic Socialist crowd thinks it doesn’t.

Now let’s look at fraud. Remember that credit card benefit you brag about to your friends all the time? “I’m only liable for the first $50 dollars of fraudulent charges on my credit card if somebody steals it.” That’s true, but that’s not a benefit, it’s the law — the Fair Credit Billing Act. However, somebody has to pay for all of those crooks and it’s the bank. Bank covered fraud losses added up to about $11 billion dollars last year.

And finally, if you are like most credit card holders, you get some sort of reward for using your card. Some cards give discounts, some give benefits, some give cash back. Mine gives me 2 percent cash back on everything I buy. Again, that’s not free, it’s paid for by the banks. Yes, banks charge merchants a few percent per transaction to accept credit cards, but that just covers the folks that pay their balance off every month, accrue no interest charges, and reap the rewards.

When we mix all of these numbers together — and it is a bit of arithmetic — it turns out that nationally, banks average barely a 4 percent eturn on their credit card business. You can cut that roughly in half after federal and state taxes, so the immoral usury that AOC and Bernie are yelling about is really just a 2 percent profit.

The Social Democrat crowd claims this bill is all about access to the financial markets for the working class crowd But they already have access — yes at a price — but when it’s broken down, a very fair price.

And, if setting arbitrary interest rate limits isn’t a bad enough idea, the bill doubles down on access by proposing to allow the Post Office to enter the banking business. It just keeps getting better and better.

• Kevin Cochrane teaches economics and business at Colorado Mesa University, and is a visiting professor of economics at The University of International Relations in Beijing.