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Biden’s War on Credit – Econlib



An Added Perversity of the $8 Cap on Late Fees

Through the Consumer Financial Protection Bureau (CFPB), the Biden administration has proposed a scheme to limit the amount that credit card companies can charge us if we are late on payments to just $8.

This sounds great at first glance, right?

Lower benefits mean less stress as we struggle to make ends meet, as inflation-adjusted average weekly incomes have fallen by 4.2 percent. But as with many things that seem too good to be true, there’s a catch.

This well-intentioned price control could make the situation very challenging for those it is supposed to help.

First, why do credit card companies charge late fees? It’s not just about making extra money. These fees ensure more credit is available to everyone and encourage us to make payments on time, keeping the credit system running smoothly.

Now the CFPB is shaking things up by setting a price cap on these fees at $8. While it may save us some money if we make a mistake and pay late, credit card companies will find ways to make up for this lost income.

And how do they do that? Well, they could start charging more for other things, become stricter about who they extend credit to, or raise interest rates. That means credit could ultimately be more expensive and harder to obtain for all of us.

Not only individuals who could feel the pressure, but also small businesses.

Many small businesses rely on credit to manage their cash flow and growth. If banks become more picky about who they lend to or increase their fees, these small businesses will find it more expensive to get credit. This isn’t just bad news for them; it’s bad news for everyone because the result will be higher prices for consumers, lower wages and fewer jobs for workers.

Remember that small banks and credit unions are very important to the local economy. These institutions often rely on fees to keep things running. If they can charge less for late payments, they may not be able to borrow as much. This could hit communities hard, making it harder for people to get loans to start a small business, buy a home or build a project.

Economists have long warned about the dangers of well-intentioned but poorly thought-out regulations. By introducing a one-size-fits-all rule for payment arrears, the government would make credit more expensive and less accessible for everyone. The idea is to protect us from unfair fees, but the practical outcome would be different if access to credit were limited to those who need it most.

History proves that the biggest challenge is often protecting consumers from the consequences of government actions. By protecting us from high payment arrears, the government will put us in a situation where credit is harder to obtain and more expensive. This does not mean that we should not try to protect consumers. Still, we need to think carefully about the consequences of our actions and let the markets work, which is the best way to protect consumers as they have sovereignty over their purchases.

While limiting credit card delinquencies sounds like a simple solution, the ripple effects would be complex and far-reaching. It is crucial to keep credit accessible and affordable, support small businesses and ensure the financial system remains robust.

Before we rush into it, let’s look at the implications of this price control regulation. Price controls never work as intended, as history has proven. Instead, we must ensure that people in the marketplace determine what is best for them, rather than the Biden administration’s top-down, one-size-fits-none approach.

Vance Ginn, Ph.D., is the president of Ginn Economic Consulting, host of the Let People Prosper Show, and previously served as deputy director for economic policy of the White House Office of Management and Budget, 2019-2020. Follow him on at @VanceGinn.