ERIC DEGGANS, HOST:
Americans are carrying massive credit card debt, $1.17 trillion according to the Federal Reserve Bank of New York. And with high interest rates, not paying those bills on time or in full can become very expensive very quickly. And that has caught the attention of two very unlikely political allies.
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DONALD TRUMP: We're going to put a temporary cap on credit card interest rates at 10%. We have no choice.
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BERNIE SANDERS: If Trump wants to impose a credit card limit on interest rates, I'll be there.
DEGGANS: Now, that's President Elect Donald Trump and Senator Bernie Sanders of Vermont. Natasha Sarin served as counselor to Treasury Secretary Janet Yellen and now teaches at Yale Law School. She's here to talk about efforts to address this issue. Welcome, Natasha.
NATASHA SARIN: Thank you so much for having me, Eric.
DEGGANS: Donald Trump and progressives like Senators Bernie Sanders and Elizabeth Warren - they want to cap credit card interest rates at 10%. Now, what would be the benefits of this policy?
SARIN: As you pointed out, Americans are carrying incredibly high credit balances, and the cost of paying interest on those debts is high. And so one of the benefits is you would pay less in interest on your credit card bill. The challenge, I think, is that it might also make it harder for you to get access to credit.
DEGGANS: Why would it be harder for consumers to get credit?
SARIN: Credit card companies take on some risk, right? The risk associated with extending credit to consumers is that they might not pay those debts back. And for customers that the card companies judge are just too risky, now that they can't charge higher interest rates, they're just going to not extend credit to those types of subprime borrowers.
And what I think is really important is you need to think about, from the perspective of those borrowers, what is their alternative? So right now, they're in a situation where they're paying average interest rates that are upwards of 20%. It could be 25%. It could be 30%. Those are incredibly high rates. But think about what they would have to do if they didn't have access to credit cards and to credit card loans. Well, they might decide to turn to pawn shops or payday lenders that charge average interest rates of almost 400%. That's more than 10 times what they're facing on their credit cards today.
DEGGANS: You recently wrote a column in the Washington Post, where you argue that lawmakers should instead, quote, "start with the low hanging fruit," end quote. What do you mean by that?
SARIN: Well, it goes back to this fact that credit card contracts - they used to be a page long and super easy to read, and now they're 38 pages long and really hard to read. Credit card companies tuck in all of these kind of hidden costs. Here's a penalty fee. Here's a minimum balance fee. But when they're advertising to you and trying to get you to open up your credit card, all they tell you is 0% APR for 12 months.
I think those hidden fees are really dangerous because they're levers for card companies to be able to adjust in ways that are unbeknownst to consumers. And I think that's really problematic because you have a right as a consumer to really understand what you're buying and what you're paying for, and it's not sort of fair to consumers for card companies to be manipulating them in this manner.
DEGGANS: I also understand that there's a problem with the sky-high rates that companies charge merchants for paying with rewards credit cards, for example.
SARIN: When you transact with your rewards card or when I transact with my credit card at the grocery store, I am sort of careful about which card I use because I get extra cash back from a particular type of credit card. And that's great for individual consumer me, Natasha. But the actual price I am paying for my transactions ends up being lower than someone who's paying in cash. And what card companies are doing is they're incentivizing people who have rewards cards to transact with those cards.
But what they're also doing is they're making it very difficult for merchants to be able to say to consumers, hey, when you pay with that rewards card, it has a 3% processing fee. So would you pay with a cheaper form of payment? Or can I charge you that extra 3% because that's the actual cost to me for your transactions? And people who are disproportionately poor who don't have access to those type of rewards methods of payment end up paying higher prices. So it's a very regressive system, and it's one that I hope regulators take a look at because that's an inequity that other countries have actually addressed.
DEGGANS: That's Natasha Sarin, a professor at Yale Law School helping us think through this. Natasha, thanks so much for joining us.
SARIN: Thanks so much for having me, Eric. Transcript provided by NPR, Copyright NPR.
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