Can a bill to cap interest rates result in higher interest rates?

Congress has a new idea: Pass a law that would force credit card companies to cap their rates at 16%. I have little doubt this will will get lots of attention, and will probably pass. On one side you have the big, evil, bail-out accepting banks, and on the other, the hard-working American who is struggling to make ends meet in this tough economy. That’s the way it will be presented, but it’s far from the truth.

Interest rates are determined by several factors, which equate to the borrowers risk profile. Those with excellent credit pay less than those with poor credit. It’s a fair system, since those with poor credit are more likely to default. For example, someone with excellent credit might pay 12%, while someone with poor credit would pay 20%. The difference might not seem fair at first, but let’s not forget that based on their payment histories, each deserves the rate they received.

Now, let’s take a look at what will happen if a 16% cap is placed on credit card rates. That person who is paying 20% will likely have their rate dropped down to the 16% cap. That is expected, but what is unknown is how the person paying 12% will be treated. Will the banks leave their rate alone, or will they raise it a few percentage points to make up for the lost revenue on the low-end portion of their credit portfolio? We’re talking about banks, so my guess is that we will see rates increased for everyone. By the way, don’t think fees would be left alone. The credit card companies will do everything in their power to maximize their profit and make up for lost revenue.

This bill treats interest rates as some irrational, arbitrary number that is out of individual control. If a consumer makes timely payments and uses credit wisely, they will receive a low rate. It’s as simple as that. Of course, we are living during the administration of Barack Hussein Obama, where government needs to inject itself into every aspect of our lives and make things better (by their standards). Sure, it will result in responsible borrowers subsidizing irresponsible borrowers, but that’s ok. Like Barack said, we need to spread the wealth around.